Quest Diagnostics Inc.’s DGX continued momentum in the base business is poised to help it grow in the upcoming quarters. The ongoing adoption of the highly specialized Advanced Diagnostics services is highly encouraging. The company is driving operational discipline through its Invigorate program, leveraging automation and AI to improve productivity. Meanwhile, rising debt levels and industry headwinds may impact the stock negatively.
In the past year, this Zacks Rank #3 (Hold) stock has risen 9.5% compared with the industry and the S&P 500 composite’s growth of 10.1% and 26.5%, respectively.
The renowned provider of diagnostic information services has a market capitalization of $17.04 billion. The company’s earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 3.41%.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Let’s delve deeper.
Tailwinds for Quest Diagnostics
Growth Momentum in the Base Business Continues: Quest Diagnostics has been experiencing robust volume growth in its core business (excluding COVID-19 Testing), banking on the growth of new physician and hospital customers, a more favorable test mix with increased use of advanced diagnostics and acquisitions. The Hospital Lab Services is posting growth above historical levels, supported by dynamics that lead to strong continued demand for reference testing. In the third quarter of 2024, the company delivered strong volume and revenue growth from its Medicare Advantage plans.
Quest Diagnostics is well-positioned to capitalize on the sustained high healthcare utilization rates and continue driving new customer growth. A strong consumer focus is helping it capture growing opportunities in consumer-initiated testing and demand for expanded access to basic health care. Its repeat customer rate has surged 30% from less than 10% two years ago, reflecting demand for comprehensive health, chronic disease and STI (sexually transmitted infection) testing.
Strong Potential of Advanced Diagnostics: Quest Diagnostics’ expanding portfolio of advanced diagnostics is driving robust adoption, leading to a favorable test mix and growth in test per requisition. Within brain health, AD-Detect blood-based Alzheimer’s disease testing has been the key driver, while women’s health is gaining from prenatal and hereditary genetic testing, consistent with recent quarters. Testing demand for genital tract infections, including several STIs, also remains strong.
In July 2024, Quest Diagnostics teamed up with Becton, Dickinson and Company to create flow cytometry-based companion diagnostics (CDx) for the selection of the best treatment for patients with cancer and other diseases. The acquisition of Haystack Oncology positions the company in the higher-growth clinical area of ctDNA (Circulating tumor DNA) solid-tumor MRD (minimal residual disease) testing.
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A Strategic Imperative to Drive Operational Excellence: As part of its broader strategy to drive operational improvements across the business, Quest Diagnostics strategically deploys automation and AI to improve quality, service, efficiency and the workforce experience. The company’s multi-year cost excellence program, Invigorate, has consistently delivered 3% annual cost savings and productivity enhancements, acting as a shield against inflationary pressures, such as rising labor and benefit costs and reimbursement challenges.
In the third quarter, the company completed the build-out of full end-to-end automation for its core routine tests at its Lenexa, KS, laboratory. It is also piloting automated specimen accessioning in its Clifton lab, which will help increase productivity in specimen processing and improve quality. The company also extended its collaboration with Hologic to include the Hologic Genius digital diagnostic system that utilizes AI to help analyze cervical cell samples.
Downsides for DGX
Escalating Debt Level: At the end of the third quarter of 2024, long-term debt in the balance sheet was $5.65 billion, while the cash and cash equivalent balance was only $764 million. The current portion of the debt stood much higher at $603 million. The times interest ratio declined 0.4% sequentially to 7.3%.
Industry Risks That May Affect the Stock: Quest Diagnostics faces several inherent risks, such as fluctuations in the healthcare utilization rate, softer testing volumes, commercial pricing pressure and reimbursement headwinds. The pressure to control healthcare costs also poses a challenge to the company.The clinical testing industry is subject to seasonal fluctuations, reducing net revenues and operating cash flows below annual averages. Additionally, clinical testing orders generated from clinician offices, hospitals, employers and consumers can be affected by changes in the U.S. economy and regulatory environment.
DGX Stock Estimate Trend
The Zacks Consensus Estimate for Quest Diagnostics’ 2024 earnings per share (EPS) has remained constant at $8.90 in the past 30 days.
The consensus estimate for the company’s 2024 revenues is pegged at $9.82 billion. This suggests a 6.2% increase from the year-ago reported number.
Key Picks
Some better-ranked stocks in the broader medical space are Haemonetics HAE, Boston Scientific BSX and Phibro Animal Health PAHC.
Haemonetics has an earnings yield of 5.59% compared with the industry’s 1.35%. Haemonetics’ earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed on one occasion, the average surprise being 2.82%. Its shares have fallen 10.5% against the industry’s 11.1% growth 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.
Boston Scientific, carrying a Zacks Rank #2 at present, has a long-term estimated earnings growth rate of 13.8%. Shares of the company have surged 54.3% compared with the industry’s 11.1% growth. BSX’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 8.29%.
Phibro Animal Health, carrying a Zacks Rank #2 at present, has an estimated earnings growth rate of 36.1% for fiscal 2025 compared with the industry’s 11.6%. Shares of the company have surged 81.1% compared with the industry’s 11.1% growth over the past year. PAHC’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 25.47%.
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