Quest Diagnostics' (DGX) Base Volume Revives, New Ruling Aids

Quest Diagnostics DGX, as part of its two-point strategy, has been focusing on areas with high potential. Positive demography and cost reduction initiatives are the other upsides. The stock currently carries a Zacks Rank #2 (Buy).

In the past year, Quest Diagnostics has outperformed its industry. The stock has lost 7.3% compared with a 26.5% decline of the industry. Quest Diagnostics reported better-than-expected second-quarter 2022 earnings and revenues. The company’s legacy base business showcased strong year-over-year growth during the quarter. According to the company, the base business performed well despite the industry-wide soft utilization trends.

Quest Diagnostics continued to progress in the base business, executing its two-point strategy to accelerate growth and drive operational excellence. With a bullish expectation for the remainder of 2022, the company raised its full-year guidance. The company’s legacy base business grew 2.9% in the second quarter amid softer utilization trends, which impacted the entire health care industry. During the reported quarter, the company saw robust performances from hematology, prenatal genetics and pharma services.

The company has also ramped up investments to accelerate growth in the base business, particularly in advanced diagnostics and direct-to-consumer testing. In Q2, the company continued to expand growth through health plan access. Quest Diagnostics renewed 12 national and large regional health plan contracts with price increases in the quarter under review.

Quest Diagnostics Incorporated Price

Quest Diagnostics Incorporated price | Quest Diagnostics Incorporated Quote

In terms of the Protecting Access to Medicare Act (PAMA), the company is optimistic about the recently introduced federal laboratory legislation called the Saving Access to Laboratory Services Act or SALSA. The company believes that SALSA has the potential to fix PAMA permanently. It would set the Medicare Clinical Lab Fee Schedule back on a sustainable path. If SALSA is not passed, it will result in Medicare cuts over three years, with additional cuts on the way.

On the flip side, in the second quarter of 2022, Quest Diagnostics’ revenues and adjusted earnings fell year over year on a significant drop in COVID-19 testing demand. Revenues for Diagnostic Information Services declined 3.6% year over year, reflecting lower COVID-19 testing services sales in the reported quarter. The year-over-year contraction in margins is also worrying. The gross margin was 34.3%, reflecting a 430-basis point (bp) contraction from the year-ago figure. Adjusted operating margin of 17.1% represented a 468-bp contraction year over year.

Further, pressure on volume, owing to a difficult macro-economic situation and pricing, constitutes the primary risk for Quest Diagnostics. Total volume, measured by the number of requisitions, was down 1.4% year over year in the second quarter. Meanwhile, revenue per requisition declined 2.6% year over year due to lower COVID-19 molecular testing volume.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. AMN, Merck & Co., Inc. MRK and Patterson Companies, Inc. PDCO.

AMN Healthcare has a long-term earnings growth rate of 3.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.7%, on average. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has lost 3.4% against the industry’s 27.8% fall.

Merck has a long-term earnings growth rate of 10.1%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 16.8%, on average. It currently carries a Zacks Rank #2.

Merck has outperformed its industry in the past year. MRK has gained 16.4% against the industry’s 2.8% growth.

Patterson Companies has an estimated long-term growth rate of 9.6%. The company’s earnings surpassed estimates in all the trailing four quarters, the average beat being 16.5%. It currently carries a Zacks Rank #2.

Patterson Companies has outperformed its industry in the past year. PDCO has gained 3.1% against the industry’s 5.1% fall in the past year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.