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Can Five Elements Drive Quest Diagnostics (DGX) Q1 Earnings?

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Quest Diagnostics Incorporated (DGX - Free Report) is scheduled to report first-quarter 2019 earnings before the opening bell on Apr 23.

In the last reported quarter, the company’s earnings were in line with the Zacks Consensus Estimate. Also, the average trailing four-quarter positive surprise was delivered at a breakeven.

Let’s take a look at how things are shaping up prior to this announcement.

Factors at Play

On a positive note, Quest Diagnostics seems well-aligned with its two-pronged agenda to accelerate growth and drive operational excellence. Per its new long-term progress outlook, revenue increase for the 2017-2020 period is expected to be 3-5% with 1-2% rise projected from acquisitions. Earnings for the same time frame are anticipated to surge faster than the top line in the mid-to-high single-digit range.

Per the company, its frequently growing partnerships with other health care leaders and prudent buyouts are creating promising opportunities for the top and the bottom line while at the same time, the patient experience gets improved and the overall cost of care is reduced.

Through 2018, the company satisfied all the five elements of its growth acceleration strategy and strongly expects this momentum to continue, going forward.

Going by the first element of its growth strategy (to further strengthen the top line by 2% through strategically accretive acquisitions), the company earlier noted that its M&A activity contributed more than 3% to its revenue growth in 2018. The nine deals it had announced since the beginning of last year, positioned the company to meet its 2019 target.

In this regard, during the quarter under review, the company completed the purchase of a clinical laboratory services business of Boyce and Bynum, a provider of diagnostic and clinical laboratory services in the Midwest. This transaction is likely to garner favorable results in the to-be-reported quarter.

Accounting for the second element of the company’s key growth plans, which is to expand relationships with hospital health systems, Quest Diagnostics entered 2019 on a bullish note. Banking on its in-network status with UnitedHealthcare, Horizon Blue Cross Blue Shield of New Jersey and Blue Cross Blue Shield of Georgia, the company has already added 43 million lives, representing about a billion-dollar opportunity for itself. This apart, it recently signed two new professional laboratory services agreements in the Southeast region. The company currently expects encouraging volume growth in first-quarter 2019, driven by its expanded network access.

Considering the third component of the company’s strategic growth schemes that offers the broadest access to diagnostic innovation, principal growth catalysts in the fourth quarter were prescription drug monitoring, QuantiFERON, tuberculosis test and Cardio IQ. We are also optimistic about the company’s successful execution of its plans OF building an esoteric testing business and boosting profitability.

This apart, per the company, the recently-inked acquisition deals are projected to upgrade its capabilities in advanced diagnostics, especially in the areas of Women’s Health and Infectious Disease.

About the fourth element of the company’s growth strategy, which is to provide ample choices to consumers, the company’s relationship with Walmart has already started adding value to this end with higher patient traffic. Besides, the company’s alliance with Safeway currently has more than 200 patient service centers across retail store locations. This positive aspect will probably get reflected in first-quarter earnings performance.

The fifth element of Quest Diagnostics’ growth policies indicates supporting population health within analytics and extended care services. In this regard, the company recently launched Quest Clinical Trial Connect, a patient recruitment service.

Apart from these five elements, in terms of the company’s efforts to ramp up operating efficiency, Quest Diagnostics’ Invigorate cost-cutting initiatives have been successful and the company is working on more opportunities ahead.

We expect these active growth drivers to replicate the company’s success story in its upcoming quarterly results. Also, a better-than-expected performance is likely to push up the same primary metrics as in the preceding quarters.

We strongly believe, all these recent developments might have significantly favored the company’s top line in the first quarter.

On the flip side, Quest Diagnostics witnessed lower-than-expected growth in prescription drug monitoring marketplace due to policy changes opposed by some payers to restrict testing in the last reported quarter. The company also bore the brunt of a rapid decline in genotyping and resistance testing in the hepatitis C market. At the same time, revenues from vitamin D testing softened on account of rising reimbursement rejections.

Overall, full-year adjusted EPS (excluding the impact of amortization expense) is projected to be more than $6.40. Revenues for 2019 are estimated in the band of $7.60-$7.75 billion (reflecting annualized growth of roughly 1-3%).

Operating cash flow for 2019 is expected at around $1.3 billion. The current forecast for capital expenditure remains within $350-$400 million.

What Our Model Suggests

Our proven Zacks model clearly indicates that a company with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has good chances of beating estimates if it also has a positive Earnings ESP.

Quest Diagnostics has a Zacks Rank #3, which increases the predictive power of ESP, and an Earnings ESP of +0.74%, a combination that can conclusively show high probability of an earnings beat on the cards. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The Zacks Consensus Estimate for earnings of $1.36 reflects a 10.5% decline on a year-over-year basis.

We caution against the Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks Worth a Look

Here are some other medical stocks worth considering as these have the perfect mix of elements to also beat on earnings this reporting cycle.

Cerner Corporation (CERN - Free Report) has an Earnings ESP of +1.05% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.

Thermo Fisher Scientific Inc. (TMO - Free Report) has an Earnings ESP of +0.26% and a Zacks Rank of 2.

Stryker Corporation (SYK - Free Report) has an Earnings ESP of +0.35% and a Zacks Rank of 3.

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