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Here's Why You Should Invest in Quest Diagnostics (DGX) Now

Zacks Equity Research
·4-min read

Quest Diagnostics Incorporated DGX has been gaining from the recovery in its base testing business. The better-than-expected results for second-quarter 2021 buoy optimism on the stock. However, reimbursement headwinds and stiff competition remain concerns.

In the past year, shares of this Zacks Rank #2 (Buy) company have gained 27.6% against the 27.4% decline of the industry and 34.1% rise of the S&P 500.

The largest provider of commercial laboratory services in North America has a market cap of $17.84 billion. The company projects 26.5% growth for the next five years. The company surpassed estimates in the trailing three quarters and missed the same in one, the average surprise being 7.53%.

Let us delve deeper.

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Q2 Upsides: The company reported better-than-expected second-quarter adjusted earnings and revenues. According to the company, this is the first quarter since 2019 in which it recorded organic base testing revenue growth. This was primarily driven by contributions from new hospital lab management contracts and people returning to the healthcare system. According to Quest Diagnostics, it is currently well-positioned to maintain its momentum and support the return to healthcare in the coming months, which is reflected in the company’s outlook for the remainder of 2021.

Base Volume Improves: Quest Diagnostics’ base testing volumes or base business refers to testing volumes, excluding COVID-19 testing. In the second quarter, its base business registered a faster-than-expected recovery. This marked the first quarter since 2019 when organic base testing revenues grew on contributions from new hospital lab management contracts and people returning to the healthcare system. In June, organic base testing revenues essentially returned to pre-pandemic levels. More specifically, the company registered a strong recovery in most parts of the country and a slower recovery in the Northeast.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Growth Acceleration Strategy Bodes Well: Quest Diagnostics is moving ahead with its accelerating growth strategy, consisting of five elements. In terms of the first element, over the past three years, the M&A pipeline has remained strong and the company achieved its goal to exceed 2% CAGR from acquisitions in the base business. Going by the second element, Quest Diagnostics continues to extend health plan contracts and tie-ups with hospital health systems. In the second quarter, the company made progress with value-based programs with UnitedHealthcare and Anthem. The volumes of these health plans are growing faster than the company average. Concerning the other elements, Quest Diagnostics has made good progress with respect to co-planned access. United Healthcare implemented an initiative removing other network benefits for insured groups in particular states.

Downsides

Reimbursement Update Not in Favor of Clinical Labs: In the last couple of years, Quest Diagnostics faced several reimbursement issues, hurting its revenues. According to Quest Diagnostics, the PAMA headwinds in 2021 are expected to be relatively consistent with 2019 and 2020. This PAMA impact includes both direct cuts to the Clinical Lab Fee Schedule and modest indirect price changes from Medicaid and a small number of floating rate contracts.

Competitive Landscape: Quest Diagnostics faces intense competition primarily from Laboratory Corporation of America, other commercial laboratories and hospitals. Hospitals control an estimated 60% of the diagnostic test market compared to Quest Diagnostic’s 15% share.

Estimate Trends

Quest Diagnostics is witnessing a positive estimate revision trend for the current year. In the past 60 days, the Zacks Consensus Estimate for earnings has moved 4.85% north to $11.68.

The Zacks Consensus Estimate for 2021 revenues is pegged at $10.01 billion, suggesting 6.04% growth from the year-ago reported number.

Other Key Picks

A few similar-ranked stocks from the broader medical space are Envista Holdings Corporation NVST, BellRing Brands, Inc. BRBR and Biolase, Inc. BIOL, each carrying a Zacks Rank #2. You can see the complete list of Zacks #1 Rank (Strong Buy) stocks here.

Envista Holdings has an estimated long-term earnings growth rate of 27%.

BellRing Brands has an estimated long-term earnings growth rate of 29%.

Biolase has a projected long-term earnings growth rate of 15%.


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