Quest Diagnostics Inc. (DGX) is scheduled to report its fourth-quarter and full-year 2014 results before the opening bell on Jan 29. Last quarter, Quest Diagnostics had posted a positive earnings surprise of 1.85%. Let’s see how things are shaping up for this announcement.
Factors at Play
Quest Diagnostics has delivered positive earnings surprises in three of the trailing four quarters with an average beat of 1.92%.
Pressure on volume owing to a difficult macro-economic situation and pricing woes constitute the primary risk for Quest Diagnostics. In the third quarter, although volume increased 7.8% year over year, it was entirely because of recent acquisitions, which added 8.0% to it. Excluding acquisitions, underlying volume declined 0.2% year over year.
The poor volume was primarily owing to the combination of Medicare cuts and commercial pricing. We are concerned with the weak volume growth trend over the past few quarters. We expect the low level of employment and slow growth of commercially-insured lives to further impact the company’s overall improvement, until the economy rebounds.
Moreover, lower healthcare utilization and reimbursement pressure from the government and other payers continue to pose threats. Although, the company claims it is witnessing signs of improving healthcare utilization, the near-term outlook appears bleak.
Nevertheless, Quest Diagnostics has been focusing on high-potential areas such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. Although the current environment is challenging, Quest Diagnostics is committed toward improved operating performance and a balanced capital deployment philosophy.
The company showed marked improvement on the back of Invigorate cost-reduction initiatives, which helped the company mitigate some of the bottom-line pressures. In Jul 2011, the company had announced an initial cost-saving target of $500 million which was increased to $600 million later on. The company delivered the original target a year earlier, and now expects to exceed the new run rate target by delivering $700 million in run rate savings on exiting 2014.
We are also upbeat about the long-term growth drivers which are expected to deliver positive outcomes in the coming period. The company currently expects revenues in 2014 to increase by 3.5% as against the earlier provided band of 2.5% to 3.5%. The current Zacks Consensus Estimate for revenues is pegged at $7.40 billion.
In addition, the company’s 2014 adjusted EPS expectation has been narrowed to the range of $4.03 to $4.07 against the earlier provided range of $4.00 to $4.10. The Zacks Consensus Estimate of $4.06 lies near the upper end of the guided range.
Earnings Whispers
Our proven model does not conclusively show that Quest Diagnostics is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: Earnings ESP for Quest Diagnostics is 0.00%, since both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.05.
Zacks Rank: Quest Diagnostics has a Zacks Rank #3 (Hold) which increases the predictive power of ESP. However, an ESP of 0.00% makes surprise prediction difficult.
Other Stocks to Consider
Here are some companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
Hologic Inc. (HOLX) has an earnings ESP of +2.78% and a Zacks Rank #2 (Buy). Hologic will report first-quarter fiscal 2015 earnings on Jan 28.
Humana Inc. (HUM) has an earnings ESP of +0.86% and a Zacks Rank #2. Humana is slated to report its fourth-quarter and 2014 earnings on Feb 4.
HEALTHSOUTH Corp. (HLS) has an earnings ESP of +3.92% and a Zacks Rank #1 (Strong Buy). HEALTHSOUTH is scheduled to report its fourth-quarter and 2014 earnings on Feb 24.
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