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Reasons to Retain Quest Diagnostics (DGX) Stock for Now
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Quest Diagnostics Inc. (DGX - Free Report) is well-poised for growth in the coming quarters, backed by stronger base volume recovery and growth from strategic acquisitions. In the first quarter, Quest Diagnostics’ earnings and revenues were well ahead of estimates. However, COVID-19 testing revenues and a contraction of margins are a concern.
In the past year, this Zacks Rank #3 (Hold) stock has gained 6.8% compared with the industry’s 4.4% fall and a 20.2% rise of the S&P 500 composite.
The renowned provider of diagnostic information services has a market capitalization of $15.67 billion. Quest Diagnostics has an earnings yield of 6.19% compared with the industry’s yield of 3.86%. The company’s earnings surpassed estimates in all the trailing four quarters, delivering an average surprise of 5.24%.
Let’s delve deeper.
Tailwinds
Q1 Upsides: Quest Diagnostics reported better-than-expected first-quarter earnings and revenues. The base business registered double-digit growth, driven by strong performance across physician and health system lab services. Health plan volumes continued to grow faster than the overall business. This trend is directly related to the company’s ongoing efforts to partner with health plans to actively steer patients to high quality, lower-cost providers like Quest, thereby saving money for the health plan, employers and plan members. In the reported quarter, Quest Diagnostics witnessed success across the board with contract wins in its reference and professional lab services offerings.
Base Volume Improves: The company’s base testing volumes or base business refers to testing volumes, excluding COVID-19 testing. During the reported quarter, base business revenues were up 10%, supported by base business volume growth of nearly 8%. It witnessed faster growth in the number of tests per requisition across a broad range of clinical test categories. This suggests more people are returning to the healthcare system for routine care after delaying care during the pandemic. Base revenues from health systems grew approximately 7% in the first quarter.
In the first quarter, the company continued to gain traction within health plans with value-based contracts. The company started benefiting from incentives related to these value-based contracts, which demonstrate the value of these strategic relationships.
Accelerate Growth Strategy Bodes Well: On Apr 27, the company announced its planned acquisition of Haystack Oncology — an early-stage oncology company, focused on minimal residual disease or minimal residual disease (MRD) testing. The combined strengths of Haystack liquid biopsy technology and DGX’s screening, pathology and sequencing will enable the latter to play a leading role in the fast-growing MRD category.
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Further, the company recently completed its strategic laboratory services acquisition with NewYork-Presbyterian. New test volumes started to flow into the company’s New Jersey laboratory earlier this month. Within advanced diagnostics, the brain health area expanded, banking on Quest AD-Detect Alzheimer's blood test.
Downsides
Lower COVID-19 Testing Revenues: COVID-19 testing revenues declined approximately 80% in the first quarter. The company completed nearly 1.3 million molecular tests in the quarter compared with five million tests in the prior-year quarter.
Mounting Expenses Strain Margins: Despite a year-over-year fall in the cost of services, the gross margin contracted 388 basis points (bps) in the first quarter. SG&A expenses rose, causing a 644-bps contraction in the adjusted operating margin.
Estimate Trend
Quest Diagnostics has been witnessing a negative estimate revision trend for 2023. The Zacks Consensus Estimate for 2023 earnings per share (EPS) has moved 0.11% north to $8.69 in past 90 days.
The consensus estimate for the company’s 2023 revenues is pegged at $9.02 billion. This suggests an 8.7% decline from the year-ago reported number.
Alcon has an estimated long-term growth rate of 14.9%. Its earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 8.85%.
ALC’s shares have gained 22.9% year to date compared with the industry’s 11.2% growth.
Perrigo’s earnings are expected to improve 24.6% in 2023. Strong momentum is likely to continue in 2024 as well. PRGO’s earnings surpassed estimates in two of the trailing four quarters and missed twice, delivering an average negative surprise of 0.79%.
PRGO’s shares have lost 17.4% in past year against the industry’s 21.6% decline.
Hologic has an estimated earnings growth rate of 4.1% for fiscal 2024. Its earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 27.32%.
HOLX’s shares have risen 12% in past year compared with the industry’s 14% growth.
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Reasons to Retain Quest Diagnostics (DGX) Stock for Now
Quest Diagnostics Inc. (DGX - Free Report) is well-poised for growth in the coming quarters, backed by stronger base volume recovery and growth from strategic acquisitions. In the first quarter, Quest Diagnostics’ earnings and revenues were well ahead of estimates. However, COVID-19 testing revenues and a contraction of margins are a concern.
In the past year, this Zacks Rank #3 (Hold) stock has gained 6.8% compared with the industry’s 4.4% fall and a 20.2% rise of the S&P 500 composite.
The renowned provider of diagnostic information services has a market capitalization of $15.67 billion. Quest Diagnostics has an earnings yield of 6.19% compared with the industry’s yield of 3.86%. The company’s earnings surpassed estimates in all the trailing four quarters, delivering an average surprise of 5.24%.
Let’s delve deeper.
Tailwinds
Q1 Upsides: Quest Diagnostics reported better-than-expected first-quarter earnings and revenues. The base business registered double-digit growth, driven by strong performance across physician and health system lab services. Health plan volumes continued to grow faster than the overall business. This trend is directly related to the company’s ongoing efforts to partner with health plans to actively steer patients to high quality, lower-cost providers like Quest, thereby saving money for the health plan, employers and plan members. In the reported quarter, Quest Diagnostics witnessed success across the board with contract wins in its reference and professional lab services offerings.
Base Volume Improves: The company’s base testing volumes or base business refers to testing volumes, excluding COVID-19 testing. During the reported quarter, base business revenues were up 10%, supported by base business volume growth of nearly 8%. It witnessed faster growth in the number of tests per requisition across a broad range of clinical test categories. This suggests more people are returning to the healthcare system for routine care after delaying care during the pandemic. Base revenues from health systems grew approximately 7% in the first quarter.
In the first quarter, the company continued to gain traction within health plans with value-based contracts. The company started benefiting from incentives related to these value-based contracts, which demonstrate the value of these strategic relationships.
Accelerate Growth Strategy Bodes Well: On Apr 27, the company announced its planned acquisition of Haystack Oncology — an early-stage oncology company, focused on minimal residual disease or minimal residual disease (MRD) testing. The combined strengths of Haystack liquid biopsy technology and DGX’s screening, pathology and sequencing will enable the latter to play a leading role in the fast-growing MRD category.
Further, the company recently completed its strategic laboratory services acquisition with NewYork-Presbyterian. New test volumes started to flow into the company’s New Jersey laboratory earlier this month. Within advanced diagnostics, the brain health area expanded, banking on Quest AD-Detect Alzheimer's blood test.
Downsides
Lower COVID-19 Testing Revenues: COVID-19 testing revenues declined approximately 80% in the first quarter. The company completed nearly 1.3 million molecular tests in the quarter compared with five million tests in the prior-year quarter.
Mounting Expenses Strain Margins: Despite a year-over-year fall in the cost of services, the gross margin contracted 388 basis points (bps) in the first quarter. SG&A expenses rose, causing a 644-bps contraction in the adjusted operating margin.
Estimate Trend
Quest Diagnostics has been witnessing a negative estimate revision trend for 2023. The Zacks Consensus Estimate for 2023 earnings per share (EPS) has moved 0.11% north to $8.69 in past 90 days.
The consensus estimate for the company’s 2023 revenues is pegged at $9.02 billion. This suggests an 8.7% decline from the year-ago reported number.
Key Picks
Some better-ranked stocks from the broader medical space are Alcon (ALC - Free Report) , Perrigo Company (PRGO - Free Report) and Hologic (HOLX - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Alcon has an estimated long-term growth rate of 14.9%. Its earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 8.85%.
ALC’s shares have gained 22.9% year to date compared with the industry’s 11.2% growth.
Perrigo’s earnings are expected to improve 24.6% in 2023. Strong momentum is likely to continue in 2024 as well. PRGO’s earnings surpassed estimates in two of the trailing four quarters and missed twice, delivering an average negative surprise of 0.79%.
PRGO’s shares have lost 17.4% in past year against the industry’s 21.6% decline.
Hologic has an estimated earnings growth rate of 4.1% for fiscal 2024. Its earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 27.32%.
HOLX’s shares have risen 12% in past year compared with the industry’s 14% growth.