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Quest Diagnostics (DGX) Hits a 52-Week High: What's Driving It?

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·4 min read
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Quest Diagnostics Incorporated DGX scaled a new 52-week high of $150.34 on Aug 10, before closing the session marginally lower at $148.57.

The company’s shares have charted a solid trajectory in recent times, appreciating 22.6% over the past year versus the 24.9% fall of the industry it belongs to and 33.6% surge of the S&P 500 composite.

Over the past five years, the company registered earnings growth of 18.8%, ahead of the industry’s 17.3% rise and the S&P 500’s 2.8% increase. The company’s long-term expected growth rate of 26.5% exceeds the industry’s growth projection of 20.5% and the S&P 500’s projected 11.3% increase.

Quest Diagnostics ended the second quarter of 2021 with better-than-expected results. Organic base testing revenue growth and stabilized demand for COVID-19 testing bode well for the stock. In terms of PAMA, the company is optimistic about the recent MedPAC report mandated under the LAB Act. Quest Diagnostics is well poised for growth in the coming quarters, which is reflected in the company’s outlook for the remainder of 2021.

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Let’s delve deeper.

Key Drivers

Q2 Upsides: Quest Diagnostics reported better-than-expected adjusted earnings and revenues for the second quarter. Organic base testing revenues witnessed growth for the first time since 2019. Despite a decline in COVID-19 testing volumes over the past few months, the company in the recent weeks noted a modest rise in PCR volumes. In terms of Protecting Access to Medicare Act (PAMA), the company is optimistic about the recent MedPAC report mandated under the LAB Act. Expansion of both margins is another upside. The company’s outlook for the remainder of 2021 is indicative that the growth momentum will continue.

Base Volume Improves: Markets are upbeat about Quest Diagnostics’ base testing volumes or base business which registered faster-than-expected recovery in the second quarter. Per the company, this is the first quarter since 2019 that organic base testing revenues has risen on contributions from new hospital lab management contracts, as well as people returning to healthcare systems. In June, organic base testing revenues essentially returned to pre-pandemic levels.

COVID-19 Test Demand Regains: Despite the anticipated industry-wide slowdown in demand for COVID-19 testing, Quest Diagnostics witnessed a stabilized and modest rise in demand for the same in the last few weeks of June, which, per the company, is attributable to the emergence of the delta variance to some extent. We believe that COVID-19 testing will remain critical to ensure safer return to schools and workplaces in the near future.

Balance Sheet Strength Aids Growth: Quest Diagnostics ended the second quarter of 2021 with cash and cash equivalents of $560 million compared with $1.23 billion at the end of the first quarter. Meanwhile, total debt came up to $4.01 billion, almost in line with the figure at the end of the first quarter. Although the quarter’s total debt was much higher than the cash and cash equivalent level indicating a leveraged balance sheet, we may note that the company has short-term payable debt of $2 million on its balance sheet. This can be treated as a positive for the company at a time when the coronavirus mayhem has forced the corporate sector to halt production and supply.

Downsides

Current Market Headwinds: Quest Diagnostics continues to be challenged by decline in healthcare utilization rate, softer volume, commercial pricing pressure and reimbursement headwind. Over the last two years, reimbursement challenges became much more pronounced with a 10% reduction in Medicare payments, cuts to pathology codes on Medicare physician fee schedule, and other factors.

Competitive Landscape: Quest Diagnostics faces intense competition, primarily from MedTech bigwigs like Laboratory Corporation of America Holdings LH, and other commercial laboratories and hospitals. The company competes with hospital-affiliated laboratories primarily on the basis of quality of service.

Zacks Rank and Key Picks

Currently, Quest Diagnostics carries a Zacks Rank #3 (Hold).

A few better-ranked stocks from the Medical - Outpatient and Home Healthcare industry include Encompass Health Corporation EHC and Ontrak, Inc. OTRK, each sporting a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Encompass Health has a long-term earnings growth rate of 18%.

Ontrak has a long-term earnings growth rate of 30%.


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Laboratory Corporation of America Holdings (LH) : Free Stock Analysis Report

Quest Diagnostics Incorporated (DGX) : Free Stock Analysis Report

Encompass Health Corporation (EHC) : Free Stock Analysis Report

Ontrak, Inc. (OTRK) : Free Stock Analysis Report

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