Time New York: Mon 18 Feb 09:12 am  |  Save 15% on H&R Block Online


Will 5 Elements Drive Quest Diagnostics (DGX) Q2 Earnings?


Quest Diagnostics Inc. DGX is scheduled to report second-quarter 2018 earnings performance before the opening bell on Jul 24.

Last reported quarter, the company’s earnings were in line with the Zacks Consensus Estimate. However, the metric outperformed the consensus mark in all the trailing four quarters with an average beat of 3.41%.

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 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 the top line 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 first-quarter 2018, the company satisfied all five elements of the above-mentioned growth agenda and strongly expects to continue with the momentum going forward.

Going by the first element of the growth strategy to inch up 1-2% through strategically accretive acquisitions, the company achieved this upside for the fifth consecutive year in 2017.

In this regard, the recent buyout of Mobile Medical Examination Service MedXM should fortify Quest Diagnostics’ mobile provider capabilities and population health management solutions for health plans. This transaction should further garner favorable results in the yet-to-be-reported quarter.

Accounting for the second element of the growth strategy — to expand relationships with hospital health systems — in April, Quest Diagnostics along with four other leading health care organizations, namely– Humana, MultiPlan and UnitedHealth Group’s Optum and UnitedHealthcare launched a pilot program applying blockchain technology to improve data quality and reduce administrative costs associated with changes to health care provider demographic data.In March, the company entered into a professional lab services agreement with an integrated healthcare delivery system in New England.

Considering the third element of the company’s growth strategy that offers the broadest access to diagnostic innovation, key growth drivers in the second quarter were prescription drug monitoring, QuantiFERON and non-invasive prenatal screening. We are also optimistic about the company’s successful execution of its strategy to build an esoteric testing business as well as boost profitability.

About the fourth element of the growth strategy, which is to act as the provider of choice for consumers, the company’s relationship with Walmart has already started to add value with higher patient traffic and this positivity is expected to soon find reflections in its second-quarter earnings performance. The Walmart locations are helping Quest Diagnostics expand into different markets and the company expects to open many more locations throughout the ongoing year.

The fifth element of Quest Diagnostics’ growth strategy is to support population health within analytics and extended care services. According to the company, the inclusion of MedXM is allowing it to close gaps between patients and healthcare professionals.

We expect these active growth drivers to replicate the company’s success story in its upcoming quarterly results. 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 second 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 the same is pegged at $7.68 billion, slightly below the company’s projected band. 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 to be $6.50-$6.70. The Zacks Consensus Estimate of $6.61 falls within this guided range.

On the flip side, after a persistently dull phasefor several quarters in the company’s revenue per requisition performance, the last three quarters saw a slim 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 unrelenting headwind of unit price, which was moderately down in less than 100 basis points. Excluding the effect 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 highlighted in the impending quarterly results.

Overall, we believe that dearth of employment and slow growth of commercially-insured lives will continuously dent the company’s volumes (measured by the number of requisitions) till the economy recovers.

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 +1.33%, which raises confidence about a positive surprise. Together, the combination suggests that the company is likely to beat on earnings this to-be-reported quarter. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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.

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:

ResMed Inc. RMD has an Earnings ESP of +3.97% and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stryker Corporation SYK has an Earnings ESP of +0.13% and a Zacks Rank #2.

McKesson Corporation MCK has an Earnings ESP of +3.95% and a Zacks Rank of 3.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.

Zacks Investment Research
<-- You can share this post with your network,
or give us your opinion and leave a comment.
Be sure to check our RSS feeds for updates.