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Why You Should Retain Quest Diagnostics in Your Portfolio

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With a market capitalization of approximately $20.26 billion, Quest Diagnostics Incorporated (DGX - Free Report) has been benefiting from consistent strategic buyouts, a solid balance sheet and positive demographic trends. However, with the recently implemented PAMA (Protecting Access to Medicare Act) rule, a persistent decline in healthcare utilization rate, softer volume, commercial pricing pressure and cutthroat competition in the niche space are denting the stock’s growth.

Pressure on volume due to a difficult macro-economic situation and pricing, constitutes the primary risk for Quest Diagnostics. Nevertheless, we have observed some changes in the volume trend over the past couple of quarters. In the last reported quarter, volume measured by a number of requisitions increased 2.2% year over year, driven by acquisitions while organic growth remained essentially flat.

Per the company, the impact of weather presented a headwind of approximately 60 basis points to volume in first-quarter 2018.

We also expect a low level of employment and slow growth of commercially-insured lives to continuously affect the company’s overall improvement until the economy rebounds.

Buoyed by the above mixed trends, the stock has a Zacks Rank #3 (Hold).

Here we take a quick look at the major factors responsible for continuously ailing Quest Diagnostics and also the brighter prospects indicating a near-term recovery.

Factors Plaguing Quest Diagnostics

Coming back to PAMA, the year opened with the first quarter operating under the clinical IP schedule, accounting for approximately 12% of the company’s revenues last year. The company still expected the impact of the final rates under PAMA to cause an approximate 4% revenue reduction in 2018 while nearly 10% in both 2019 and 2020 as well.

Quest Diagnostics faces intense competition, primarily from Laboratory Corporation of America Holdings (LH - Free Report) , other commercial laboratories and hospitals. Hospitals control an estimated 60% of the diagnostic test market compared with Quest Diagnostic’s 15% share.

While pricing is an important factor in choosing a testing lab, hospital-affiliated physicians expect a high level of service including accurate and rapid turnaround of testing results. As a result, Quest Diagnostics and other commercial labs compete with hospital-affiliated labs, primarily on the basis of service quality.

Why Should You Hold?

We are optimistic about Quest Diagnostics’ consistent efforts to refocus on core diagnostic information services business and a disciplined capital deployment. The company’s latest acquisitions and collaborations with hospitals and integrated delivery networks continue to act as major growth drivers.

We are also upbeat about the company entering into an expanded long-term strategic partnership agreement with UnitedHealthcare, a business of UnitedHealth Group (UNH - Free Report) , to operate as a preferred national laboratory for all the company’s members starting Jan 1, 2019. This extended pact will provide in-network access to Quest Diagnostics’ complete portfolio of laboratory services to more than 48 million eligible members.

Under the widened tie-up, the companies are going to join forces on a variety of value-based programs. 

Further, Quest Diagnostics’ merger and acquisition activity is being executed successfully. Recently, the company completed the acquisition of MedXM, a leading national provider of home-based health risk assessments related services.

In 2017, the company announced seven acquisition activities, which should help exceed Quest Diagnostics’ long-term M&A objective of 1-2% top-line growth for 2018. Among these buyouts, worth noting is the company’s recently-closed buyout of the Cleveland HeartLab from Cleveland Clinic.

Price Performance

Quest Diagnostics has outperformed its industry in a month's time. The stock has gained 9% compared with the industry's rise of 7.3%.

 

Key Pick

A better-ranked stock in the broader medical space is Genomic Health (GHDX - Free Report) .

Genomic Health has a long-term earnings growth rate of 19.3%. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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