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Here's Why You Should Hold Quest Diagnostics (DGX) Stock Now

Quest Diagnostics Incorporated DGX has been gaining from strong year-over-year growth in the base business, signifying industry-wide recovery. The company raised the lower end of its revenue view and upped earnings expectations, instilling optimism. However, market headwinds and stiff competition remain concerns.

In the past year, shares of this Zacks Rank #3 (Hold) company have lost 0.3% compared with the 51.1% plunge of the industry and the 12.3% decline of the S&P 500.

The largest provider of commercial laboratory services in North America has a market cap of $15.32 billion. In the trailing four quarters, the company surpassed estimates in three quarters and missed the same once, the average surprise being 13.66%.

Let us delve deeper.

Key Growth Catalysts

Base Volume Improves: Quest Diagnostics’ base testing volumes or base business refers to testing volumes, excluding COVID-19 testing. The company’s legacy base business grew more than 6.3% in the first quarter of 2022. The company noted that, in the first quarter, it continued to make inroads with its health plans, gaining share and increasing revenues faster than the market. Quest Diagnostics’ health plan revenues, excluding COVID-19, grew faster than its overall base business performance in the first quarter.

COVID-19 Test Demand to Remain: COVID-19 testing revenues were significantly down in the first quarter. However, Quest Diagnostics noted that nearly 60% of the COVID-19 revenues came from the Omicron peak in January. The company expects continued demand for PCR testing through the end of 2022 and into 2023, albeit at lower levels. The public health emergency was extended into July, maintaining the company’s current level of reimbursement. Based on these factors, it raised its COVID-19 revenue guidance for 2022 to $850 million-$1 billion.

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EPS Guidance Raised: The company raised its 2022 EPS guidance. Adjusted earnings per share are expected to be $9.00-$9.50 (compared with the earlier stated $8.65-$9.35). The Zacks Consensus Estimate for the metric is pegged at $9.01. Full-year net revenues are now estimated to be $9.20-$9.50 billion (increasing the low end of the earlier mentioned $9.00-$9.50). The Zacks Consensus Estimate for the same is pegged at $9.31 billion.

Downsides

Competitive Landscape:Quest Diagnostics faces intense competition primarily from LabCorp, other commercial laboratories and hospitals. Hospitals control an estimated 60% of the diagnostic test market compared with Quest Diagnostic’s 15% share.

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 on the basis of the quality of service.

Current Market Headwinds Weigh Heavy:The current market environment remains challenging for Quest Diagnostics due to a persistent decline in healthcare utilization rate, softer volume, commercial pricing pressure and reimbursement headwind.

Estimate Trend

Quest Diagnostics is witnessing a positive estimate revision trend for the current year. In the past 60 days, the Zacks Consensus Estimate for its earnings has moved 1.9% north to $9.32.

The Zacks Consensus Estimate for 2022 revenues is pegged at $9.26 billion, suggesting a 14.2% decline from the year-ago reported number.

Key Picks

A few better-ranked stocks in the broader medical space are Alkermes plc ALKS, AMN Healthcare Services, Inc. AMN and Medpace Holdings, Inc. MEDP.

Alkermes has an estimated long-term growth rate of 25.1%. Alkermes’ earnings surpassed estimates in the trailing four quarters, the average surprise being 350.5%. It currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alkermes has outperformed the industry over the past year. ALKS has gained 11.1% compared with the industry’s 44.7% decline in the said period.

AMN Healthcare has a long-term earnings growth rate of 1.1%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.6%, on average. It currently has a Zacks Rank #2 (Buy).

AMN Healthcare has outperformed its industry in the past year. AMN has gained 5.1% against the industry’s 66.5% fall.

Medpace has a historical growth rate of 27.3%. Medpace’s earnings surpassed estimates in the trailing four quarters, the average surprise being 17.1%. It currently has a Zacks Rank #2.

Medpace has outperformed its industry in the past year. MEDP has declined 22.5% compared with the industry’s 66.5% fall.


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