Quest Diagnostics: Strong Q2, Strategic Initiatives Add Value

On Jul 22, 2016, we issued an updated research report on Quest Diagnostics, Inc. (NYSE:DGX) – a major commercial laboratory services provider.

Quest Diagnostics surpassed the Zacks Consensus Estimate for earnings as well as revenues for the second-quarter 2016.

Quest Diagnostics has successfully complied with its five-point strategy that focuses on areas with high potential such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. Although during the second quarter, revenues declined 1% on a reported basis, this was mainly due to the company’s efforts to refocus on the core business.

Consequently, revenues grew 2.4% on an equivalent basis and once again the company is optimistic about its performance for the rest of 2016 (second-quarter 2016 Diagnostic Information Service revenues grew by 2.2% on a year-over-year basis).

In the last couple of months, the company has made a number of strategic product launches and forged new partnerships.

This includes three new cancer test services that will provide clinically actionable insight into an individual's risk of developing hereditary forms of cancer. These tests will remain part of the company's newly branded Quest Vantage cancer test menu.

We are also looking forward to the company’s recently formed alliance with HealthONE System of HCA Healthcare (NYSE:HCA) to improve the quality and value of diagnostic services. Per the agreement, Quest Diagnostics will manage in-patient laboratory operations for six Denver-area hospitals in the HealthONE system.

We are also optimistic about the current favorable demographic trends along with Quest Diagnostics’ mergers and acquisitions activity which is on track with its strategy. The company’s recent acquisition of the Outreach Laboratory Services business of Clinical Laboratory Partners (CLP) as well as the Professional Lab Services Agreements from Barnabas Health, are aiding in delivering continued implementation of an accelerated growth plan.

However, through the past several quarters, the overall soft industry trends, responsible for low volume growth, have been a major concern for the company. Furthermore, Quest Diagnostics is highly disappointed with the recent CMS proposal related to the Protecting Access to Medicare Act (PAMA). While CMS' has once again decided to further delay the execution of the new payment system until Jan 1, 2018, Quest Diagnostics is apprehensive about the effect of the final rule, taking into consideration the clinical lab fee schedule representing approximately 12% of its revenues.

Moreover, lower healthcare utilization continues to be a major drag. Although the company has witnessed signs of modest increase in utilization, sustainability is still a concern.

The stock currently carries a Zacks Rank #2 (Buy).

Key Picks in the Sector

Some other stocks in the healthcare sector worth considering are AmSurg Corp. (NASDAQ:AMSG) , LHC Group, Inc. (NASDAQ:LHCG) and BioScrip, Inc. (NASDAQ:BIOS) , all with the same Zacks rank #2.