On Feb 5, 2015, we issued an updated research report on Quest Diagnostics, Inc. (DGX) – a major commercial laboratory services provider. Over the past several quarters, the overall soft industry trends responsible for low volume growth have acted as a dampener for the company. Nevertheless, we are positive on the currently favorable demographic trends.
The company recently reported a better-than-expected fourth quarter of 2014 with both earnings and revenues beating the respective Zacks Consensus Estimate. The quarter’s adjusted EPS from continuing operations of $1.08 exceeded the Zacks Consensus Estimate by 3 cents and the year-ago number by 4.9%. Revenues from continuing operations were up 7.2% year over year at $1.90 billion, beating the Zacks Consensus Estimate of $1.84 billion.
Despite the slow uptake for the Affordable Care Act (ACA), the company expects more insured lives to enter the market each year. As stated by Quest Diagnostics, the ACA has led to modest underlying improvement in 2014 and the company is expecting the same trend even in 2015 with respect to Medicaid lives, with the expansion of Medicaid in many of the states.
On the reimbursement front, Quest Diagnostics expects to see less government pressure on the clinical lab fee schedule in 2015 than in the previous two years. At this time, the industry is focused on effectively implementing the Doc Fix legislation also known as Protecting Access to Medicare Act of 2014 (PAMA), which calls for an orderly review of the clinical lab fee schedule. Currently, the American Clinical Lab Association (ACLA) is working closely with the Center for Medicare and Medicaid services (CMS) on the rulemaking process.
Of late, Quest Diagnostics has been focusing on high-potential areas such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. Accordingly, over the long haul, we expect Quest Diagnostics, as a provider of low-cost diagnostic information services, to be able to garner greater growth in this high-potential but still under-penetrated niche market.
However, pressure on volume, owing to a difficult macro-economic situation and pricing, constitutes the primary risk for Quest Diagnostics. Although the recent volume improvement benefited the company’s top line in the reported quarter, organic volume is still sluggish.
Moreover, lower healthcare utilization still acts as a major deterrent. Although, the company has seen signs of modest increase in utilization, sustainability is still a matter of question. The stock currently carries a Zacks Rank #2 (Buy).
Other Stocks to Consider
Some other well-ranked stocks in the same sector are Amedisys Inc. (AMED), HEALTHSOUTH Corp. (HLS) and US Physical Therapy Inc. (USPH). All three stocks carry a Zacks Rank #2.
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