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Can M&A Activity Drive Quest Diagnostics (DGX) Q4 Earnings?

Zacks Equity Research

Quest Diagnostics Incorporated DGX is scheduled to report fourth-quarter 2018 earnings before the opening bell on Feb 14.

In the last reported quarter, the company’s earnings were in line with the Zacks Consensus Estimate. However, average trailing four-quarter beat was delivered at 0.18%.

Let’s take a look at how things are shaping up prior to this announcement.

Factors at Play

On a positive note, Quest Diagnostics seems well-aligned with its agenda to accelerate growth and drive operational excellence. Per its new long-term progress outlook, revenue increase for the period 2017-2020 is expected to be 3-5% with 1-2% rise projected from acquisitions. Earnings for the period are anticipated to surge faster than the top line in the mid-to-high single- digit range.

Per the company, its frequently growing partnerships with other health care leaders and strategic acquisitions are creating promising opportunities for the top and the bottom line while improving the patient experience and reducing the overall cost of care.

In third-quarter 2018, the company satisfied all five elements of the above-mentioned growth agenda and strongly expects this momentum to continue, going forward.

Quest Diagnostics Incorporated Price and EPS Surprise

Quest Diagnostics Incorporated Price and EPS Surprise | Quest Diagnostics Incorporated Quote

Going by the first constituent of the growth strategy (to increase top-line improvement by 1-2% through strategically accretive acquisitions), the company is supposed to complete three advantageously aligned, accretive buyouts in the fourth quarter 2018, namely PhenoPath, the U.S. laboratory services business of Oxford Immunotec and ReproSource.These transactions are likely to garner favorable results in the to-be-reported quarter. The company earlier expected to see about 250 basis points of growth from M&As in 2018.

Accounting for the second element of the company’s key growth plans, which is to expand relationships with hospital health systems, Quest Diagnostics along with four other leading health care organizations, namely Humana, MultiPlan, UnitedHealth Group’s Optum and UnitedHealthcare launched a pilot program last year, applying blockchain technology to enhance data quality and lower administrative costs associated with changes to health care provider demographic data.

Considering the third component of the company’s strategic growth schemes that offers the broadest access to diagnostic innovation, principal growth catalysts in the third quarter were prescription drug monitoring, QuantiFERON, tuberculosis test and non-invasive prenatal screening. We are also optimistic about the company’s successful execution of its intent to build an esoteric testing business and boost profitability.

This apart, according to the company, the recently-inked acquisition deals are projected o upgrade its capabilities in advanced diagnostics, especially in the areas of Women’s Health and Infectious Disease.

About the fourth element of the company’s growth strategy, which is to provide ample choices to consumers, the company’s relationship with Walmart has already started adding value to this end with higher patient traffic. Besides, the company’s alliance with Safeway is predicted to have more than 200 patient service centers at retail store locations by 2018 end. This positive aspect will probably get reflected in fourth-quarter earnings performance.

The fifth element of Quest Diagnostics’ growth policy is to support population health within analytics and extended care services. In this regard, the company recently launched Quest Clinical Trial Connect, a patient recruitment service.

Also, the company’s tactic to steer operating efficiency is on track. Quest Diagnostics has been converting to electronic requisition and has begun digitalized pick up through Quanum HCP Portal and is winning 200 clients each week. These efforts are directed to propel operational excellence for meeting the cost of wage inflation and reimbursement pressure.

We expect these active growth drivers to replicate the company’s success story in its upcoming quarterly results. Also, the performance is likely to push up the same primary metrics like the preceding quarter.

We strongly believe, all these recent developments might have significantly contributed to the company’s top line in the fourth quarter.

On the flip side, Quest Diagnostics witnessed lower-than-expected growth in prescription drug monitoring marketplace due to policy changes opposed by some payers to restrict testing in the last reported quarter. The company also bore the brunt of a rapid decline in genotyping and resistance testing in the hepatitis C market. At the same time, revenues from vitamin D testing softened on account of rising reimbursement rejections.

Overall, excluding the impact of amortization expense, adjusted EPS for 2018 is forecast within $6.53-$6.60. The Zacks Consensus Estimate of $6.33 is below the guided range. Revenues for the full year are envisioned at around $7.62 billion (marking annualized growth of roughly 3%).The current Zacks Consensus Estimate for revenues of $7.58 billion falls short of the company’s assumed figure.

What Our Model Suggests

Our proven Zacks model clearly indicates that a company with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has good chances of beating estimates if it also has a positive Earnings ESP.

Quest Diagnostics has a Zacks Rank #4, which decreases the predictive power of ESP, and an Earnings ESP of +1.96%, a combination that does not conclusively show an earnings beat for the stock. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The Zacks Consensus Estimate for earnings of $1.36 reflects a 1.45% decline on a year-over-year basis.

We caution against the Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Worth a Look

Here are some medical stocks worth considering as these have the perfect mix of elements to beat on earnings this reporting cycle.

BioDelivery Sciences International, Inc. BDSI has an Earnings ESP of +38.46% and a Zacks Rank of 1. You can see the complete list of today's Zacks #1 Rank stocks here.

MacroGenics, Inc. MGNX has an Earnings ESP of +5.44% and a Zacks Rank #2.

TG Therapeutics, Inc. TGTX has an Earnings ESP of +0.55% and is a Zacks #1 Ranked player.

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