Quest Diagnostics (DGX) Base Sales Recover Amid Price Woe
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 act 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 13.5% against a 44% decline of the industry.
Quest Diagnostics posted better-than-expected fourth-quarter revenues and in-line earnings. The company’s legacy base business grew more than 19% in 2021, achieving record levels. In the fourth quarter, base testing volumes increased by more than 10% compared with the fourth quarter of 2019. Excluding acquisitions, total base testing volumes grew approximately 5% compared with 2019 and benefited from new PLS contracts that have increased over the last year.
The company raised its 2022 guidance based on the continued rebound in base business and recent investments expected to accelerate growth.
COVID-19 testing volumes moderated early in the fourth quarter, following the peak of the Delta wave in September but then surged again in early December as the Omicron variant spread across the United States. Quest Diagnostics reported nearly 7.9 million molecular tests and almost 73000 serology tests in the fourth quarter. Revenue per requisition increased 25.2% versus the prior year, largely driven by COVID-19 testing. The company performed an average of 1,20,000 COVID-19 molecular tests per day in the fourth quarter and maintained strong average turnaround times.
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.
During the fourth-quarter earnings call, the company noted that the delay of the 2022 PAMA cuts announced last year proved beneficial for the industry and Medicare beneficiaries. Earlier, PAMA cuts of nearly $80 million were expected in 2022 but are now delayed by a year until 2023.
Quest Diagnostics Incorporated Price
Quest Diagnostics Incorporated price | Quest Diagnostics Incorporated Quote
In the fourth quarter of 2021, Quest Diagnostics reported a year-over-year decline in revenues and adjusted earnings due to lower COVID-19 testing demand during the fourth quarter. Per the company’s preliminary fourth-quarter announcement in January, COVID-19 testing volumes in the fourth quarter, which included around 7.9 million molecular tests and 0.7 million serology tests, declined from the year-ago period.
The year-over-year contraction in margins is also worrying. The gross margin was 37.4%, reflecting a 488-basis point (bps) contraction from the year-ago figure. Adjusted operating margin of 20.5% showed a 690 bps contraction year over year.
Further, pressure on volume, owing to a difficult macro-economic situation and pricing, constitutes the primary risk for Quest Diagnostics.
Key Picks
A few better-ranked stocks in the broader medical space are Henry Schein, Inc. HSIC, Owens & Minor, Inc. OMI and AmerisourceBergen Corporation ABC.
Henry Schein has an estimated long-term growth rate of 11.8%. Henry Schein’s earnings surpassed estimates in the trailing four quarters, the average surprise being 25.5%. It carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Henry Schein has outperformed the industry over the past year. HSIC has gained 34.1% compared with the industry’s 12.2% rise over the past year.
Owens & Minor has a long-term earnings growth rate of 23.6%. Owens & Minor’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 29.5%, on average. It carries a Zacks Rank #2 (Buy).
Owens & Minor has outperformed the industry over the past year. OMI has gained 23.3% against a 12.7% industry decline in the said period.
AmerisourceBergen has a long-term earnings growth rate of 8.2%. AmerisourceBergen’s earnings surpassed estimates in three out of the trailing four quarters and missed in one, delivering an average surprise of 2.3%. The stock currently carries a Zacks Rank #2.
AmerisourceBergen has outperformed its industry in the past year, gaining 34.7% compared with the industry’s 12.2% rise.
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