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Will Buyouts Help Quest Diagnostics (DGX) Beat Q1 Earnings?

Zacks

Quest Diagnostics Inc. DGX is scheduled to report first-quarter 2018 earnings performance before the opening bell on Apr 19.

Last quarter, the company’s earnings surpassed the Zacks Consensus Estimate by a penny, delivering a positive surprise of 0.73%. Also, the metric outperformed the consensus mark in all the trailing four quarters with an average beat of 6.83%.

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-point growth agenda to accelerate growth and drive operational excellence.Per its new long-term growth outlook (beyond 2017), revenue increase for the period 2017-2020 is expected to be 3-5% with 1-2% growth projected from acquisitions. Earnings for the period are anticipated to rise faster than revenues in the mid-to-high single digit range.

The company estimates revenue growth for the period 2017-2020 at 3-5%. Per the company, its increasing number of partnerships with other health care leaders and strategic acquisitions is creating promising opportunities for the top and bottom-line growth while improving the patient experience and reducing the overall cost of care.

In this regard, we take a note of two recent strategic M&As by Quest Diagnostics. First, the acquisition of Cleveland HeartLab, which should help strengthen the company’s position in the New York metropolitan marketplace. Second, the buyout of Mobile Medical Examination Service MedXM, which should fortify Quest Diagnostics’ mobile provider capabilities and population health management solutions for health plans. These two transactions should garner favorable results in the yet-to-be-reported quarter.

We are also optimistic about the company’s successful execution of its strategy to build esoteric testing business as well as boost profitable growth.

Additionally, Quest Diagnostics has recently witnessed a significant improvement via infectious disease testing, prescription drug monitoring and industry-leading wellness business. Therefore we expect these growth drivers to replicate the company’s success story in its upcoming quarterly results, having thus remained active throughout. Also, the performance is likely to drive the same primary metrics like the preceding quarter.

We strongly believe all these recent developments to have significantly contributed to the company’s top line in the first quarter.

The company expects 2018 revenues in the range of $7.7-$7.77 billion (annualized growth of 4-5%). The Zacks Consensus Estimate for revenues is pegged at $7.94 billion, ahead of the company’s projected range.Excluding the impact of special items, amortization expense and ETB (excess tax benefit associated with stock based compensation), adjusted EPS for the full year is projected in the band of $6.50-$6.70. The Zacks Consensus Estimate of $6.10 falls below this guided range.

On the flip side, after a phase of continual drag for several quarters in the company’s revenue per requisition performance, the last three quarters saw a slight rebound. However, it still remains to be seen if this upside is here to stay or not.

The company’s two Professional Lab Services engagements — WJ Barnabas Health and HealthONE System of HCA Holdings, Inc. (HCA) — also carry lower revenue per requisition due to the nature of work.

Further, we should take into consideration the persistent headwind of unit price, which was moderately down in less than 100 basis points. Excluding the impact of Protecting Access to Medicare Act of 2014 (PAMA), the company expects unit price headwinds in 2018 to remain below 100 basis points with PAMA adding an extra headwind of approximately 50 basis points to it. This should also get reflected in the first-quarter results.

Overall, we believe that lack of employment and slow growth of commercially-insured lives will continuously affect the company’s volumes (measured by the number of requisitions) till the economy turns around for better.

What Our Model Suggests

Per the proven Zacks model, 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 +3.19%, which raises confidence about a positive surprise. Together, the combination suggests that the company is likely to beat on earnings this quarter.

Conversely, we caution against the Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Other Stocks Worth a Look

Here are a few other medical stocks worth considering with the right combination of elements to surpass estimates this time around:

Abaxis, Inc. ABAX has an Earnings ESP of +1.56% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Abbott Laboratories ABT has an Earnings ESP of +0.89% and a Zacks Rank of 3.

Henry Schein HSIC has an Earnings ESP of +3.34% and is a Zacks #3 Ranked player.

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