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Quest Diagnostics (DGX) COVID Test Sales Aid Amid Price Woe

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Quest Diagnostics, Inc. DGX, as part of its two-point strategy, has been focusing on areas with high potential. Yet, the soft industry trends leading to a low volume environment have acted as a dampener for the company. The stock currently carries a Zacks Rank #3 (Hold).

Over the past year, Quest Diagnostics has outperformed its industry. The stock has gained 9.4% against the 49.5% decline of the industry.

Quest Diagnostics reported better-than-expected third-quarter 2021 adjusted earnings and revenues. The base business continued to deliver solid volume growth compared to the pre-pandemic levels. The temporary softness in base business in summer eased in September.

Quest Diagnostics noted that its base business continued to improve sequentially in the third quarter, signifying the ongoing recovery trend of the industry. In COVID-19 testing, molecular diagnostic testing volumes increased sequentially in the third quarter, driven by the massive spread of the Delta variant over the course of summer. Testing began to increase meaningfully in mid-July and peaked in early-to-mid-September.

After raising its full-year projection in September, Quest Diagnostics further increased the same on its third-quarter earnings call. The latest increase in guidance for the remainder of the year is based on higher-than-anticipated COVID-19 volumes as well as the continued rebound in base business despite rising labor costs and inflationary pressure. According to the company, the growing momentum of the base business positions it to deliver a strong 2022 outlook that the company announced on its March 2021 investor day.

Quest Diagnostics Incorporated Price

Quest Diagnostics Incorporated Price
Quest Diagnostics Incorporated Price

Quest Diagnostics Incorporated price | Quest Diagnostics Incorporated Quote

In terms of the Protecting Access to Medicare Act (PAMA), the company earlier noted that it is optimistic about the recent MedPAC report mandated under the LAB Act. This MedPAC report found it feasible to change the CMS data collection process to a statistically valid sample of private payer rates for independent labs, hospital labs and physician office labs.

On the flip side, in the third quarter of 2021, Quest Diagnostics reported a year-over-year decline in revenues and adjusted earnings due to an unfavorable comparison with a very strong year-ago quarter. The company also noted that in late summer it experienced some softness in the base business across the country, partially caused by the rise of the Delta variant and the timing of summer vacations.

The year-over-year contraction in margins is also concerning. The gross margin was 39.8% in the reported quarter, reflecting a 349 basis points (bps) contraction from the year-ago figure. Adjusted operating margin of 24.4% represented a 467-bps contraction year over year.

Pressure on volume, owing to a difficult macro-economic situation and pricing, constitutes the primary risk for Quest Diagnostics. Till the company’s last update in October 2021, average COVID-19 molecular testing volumes declined approximately 10% from the Q3 level. Revenue per requisition declined 5.4% due to lower COVID-19 molecular testing volume and, to a lesser extent, recent PLS wins. Unit price headwinds remained modest and in line with the company’s expectations.

Key Picks

A few better-ranked stocks in the broader medical space are Baxter International Inc. BAX, Hologic, Inc. HOLX and Cerner Corporation CERN.

Baxter, currently carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 9.5%. Baxter’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 10.2%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Baxter has outperformed the industry over the past year. BAX has gained 9.7% against a 17.4% decline of the industry in the said period.

Hologic, carrying a Zacks Rank #2 at present, has a long-term earnings growth rate of 7.4%. HOLX surpassed earnings estimates in three of the trailing four quarters and missed on another occasion, delivering an average surprise of 29.2%.

Hologic has declined 10.1% compared with the industry’s 13% drop over the past year.

Cerner, carrying a Zacks Rank #2 at present, has a long-term earnings growth rate of 12.8%. CERN’s earnings surpassed estimates in three of the trailing four quarters and met estimates on another occasion, delivering an average surprise of 3.2%.

Cerner has gained 13.3% against the industry’s 57.6% slump over the past year.


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