Reasons to Retain Quest Diagnostics (DGX) Stock for Now

Quest Diagnostics Inc. DGX is likely to grow in the coming quarters, backed by its robust strength in the base business. The company is enabling growth across its customer channels through advanced diagnostics, with an intense focus on faster-growing clinical areas, including molecular genomics and oncology. Continuous progress in terms of operational and productivity improvements is highly encouraging.

However, the company’s solvency level and competitive disadvantages remain a concern.

In the past year, this Zacks Rank #3 (Hold) stock has decreased 11.4% against the industry’s 1.1% growth and 12.1% rise of the S&P 500 composite.

The renowned provider of diagnostic information services has a market capitalization of $15.26 billion. Quest Diagnostics has an earnings yield of 6.42% compared with the industry’s yield of 4.68%. The company’s earnings surpassed estimates in all the trailing four quarters, delivering an average surprise of 3.07%.

Let’s delve deeper.

Tailwinds

Strong Potential of Advanced Diagnostics: A key pillar of the company’s strategy is to support faster growth across all customer segments through highly specialized advanced diagnostics. Within the segment, the QuestAD-Detect Alzheimer's blood test is adding to Neurology’s growth trends, fortifying the company’s position in the rapidly evolving Alzheimer’s landscape.

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In the third quarter, Quest also reported strong demand for the Alzheimer's cerebral spinal fluid panel. The company was granted FDA Breakthrough Device Designation for its adeno-associated virus called AAV companion diagnostic, developed in collaboration with Sarepta Therapeutics for the Duchenne muscular dystrophy gene therapy. Further, DGX continues to hold growth momentum in the cardiometabolic, endocrinology, infectious disease and carrier and prenatal genetic screening services.

Volume Rebound in the Base Business: Quest Diagnostics’ collaborations with health plans, hospitals and physicians have elevated the demand for services, which shows continued return to care. In the third quarter, the company successfully completed negotiations for all strategic health plan renewals scheduled for 2023, positioning it to build on growth opportunities.

Across Physician Lab Services, a large number of strategic partnerships with health plans involve value-based arrangements, which are leading to faster growth and share gains than traditional relationships. Within Hospital labs, progress in terms of partnerships with Northern Light Health, Lee Health and Tower Health is particularly encouraging in the Professional Lab Services (“PLS”) business. In Consumer Health, the company generated solid base business revenue growth from the consumer-initiated testing channel in the third quarter.

A Strategic Imperative to Drive Operational Excellence: In terms of driving operational excellence, the company focuses on improving its operational quality, service and costs, thereby driving productivity gains.

The Invigorate initiative, which consists of several flagship programs with individually structured plans, was designed to reduce its cost structure and improve performance. Quest Diagnostics is committed to achieving its savings and productivity improvements of approximately 3% annually via this initiative.

Earlier in 2023, the company implemented an automated microbiology solution in Lenexa, KS, with Lewisville, TX, being the next in line. Post completion, Quest’s four major laboratories will use automated microbiology lines with artificial intelligence embedded, identifying positive and negative cases leading to improved quality and productivity. In addition, Quest Diagnostics finds great potential in generative AI to deliver insights and content to better target and serve customers and create innovations that help standardize its lab operations.

Downsides

Escalating Debt Level: As of Sep 30, 2023, the long-term debt was $3.95 billion, while the cash and cash equivalent balance was only $143 million. The current portion of the debt also stood much higher at $304 million. A higher debt level induces higher interest payments, which come with the risk of failure to pay the same. The times interest earned for the company stands at 8%, a sequential drop from 8.7% at the end of the second quarter.

Competitive Landscape: Quest Diagnostics faces intense competition, primarily from LabCorp, other commercial laboratories and hospitals. While pricing is an important factor in choosing a testing lab, hospital-affiliated physicians expect a high level of service, including the accurate and rapid turnaround of testing results. As a result, Quest Diagnostics and other commercial labs compete with hospital-affiliated labs, primarily based on the quality of service.

Estimate Trend

The Zacks Consensus Estimate for Quest Diagnostics’ 2023 earnings per share (EPS) has moved up from $8.69 to $8.71 in the past 30 days.

The consensus estimate for the company’s 2023 revenues is pegged at $9.21 billion. This suggests a 6.8% decline from the year-ago reported number.

Key Picks

Some better-ranked stocks in the broader medical space are Haemonetics HAE, Insulet PODD and DexCom DXCM.

Haemonetics has an estimated earnings growth rate of 28.4% for fiscal 2024 compared with the industry’s 15.3%. HAE’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 16.1%. Its shares have decreased 5.1% compared with the industry’s 6.5% fall in the past year.

HAE carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Insulet, sporting a Zacks Rank #1 at present, has a long-term estimated earnings growth rate of 39.2% compared with the industry’s 11.7%. Shares of the company have decreased 38.6% compared with the industry’s 6.5% decline over the past year.

PODD’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 105.1%. In the last reported quarter, it delivered an average earnings surprise of 77.5%.

DexCom, carrying a Zacks Rank #2 at present, has an estimated long-term earnings growth rate of 33.6% compared with the industry’s 13.8%. Shares of DXCM have decreased 1.5% compared to the industry’s 9.1% decline over the past year.

DXCM’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 36.4%. In the last reported quarter, it delivered an average earnings surprise of 47.1%.

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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.

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