On Apr 9, 2015, we issued an updated research report on Quest Diagnostics, Inc.DGX - a major commercial laboratory services provider. Quest Diagnostics currently combines a favorable Zacks Rank #2 (Buy) with the highly desirable Zacks Value Style Score of 'A' and a Zacks Growth Style Score of 'B'.
Earlier, the company reported a better-than-expected fourth quarter of 2014 with both earnings and revenues beating the respective Zacks Consensus Estimate. Despite the slow uptake for the Affordable Care Act (ACA), the company expects more insured lives to enter the market each year.
As stated by Quest Diagnostics, the ACA has led to modest underlying improvement in 2014 and the company is expecting the same trend even in 2015 with respect to Medicaid lives, with the expansion of Medicaid in many of the states.
On the reimbursement front, Quest Diagnostics expects to see less government pressure on the clinical lab fee schedule in 2015 than in the previous two years. At this time, the industry is focused on effectively implementing the Doc Fix legislation also known as Protecting Access to Medicare Act of 2014 (PAMA), which calls for an orderly review of the clinical lab fee schedule. Currently, the American Clinical Lab Association (ACLA) is working closely with the Center for Medicare and Medicaid services (CMS) on the rulemaking process.
Of late, Quest Diagnostics has been focusing on high-potential areas such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. Accordingly, over the long haul, we expect Quest Diagnostics, as a provider of low-cost diagnostic information services, to be able to garner greater growth in this high-potential but still under-penetrated niche market. As a part of this effort, last week, the company entered into a definitive agreement with Quintiles Transnational Holdings Inc. (Q) to form a global clinical trials laboratory services business.
However, pressure on volume, owing to a difficult macro-economic situation and pricing, constitutes the primary risk for Quest Diagnostics. Although the recent volume improvement benefited the company's top line in the reported quarter, organic volume is still sluggish.
Moreover, lower healthcare utilization acts as a major deterrent. Although the company has seen signs of modest increase in utilization, sustainability is still a matter of question. The stock currently carries a Zacks Rank #2 (Buy).
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