Will Quest Diagnostics' (DGX) Earnings Surprise In Q2?

Quest Diagnostics Inc. (NYSE:DGX) is scheduled to report its first-quarter 2016 earnings results before the opening bell on Jul 21, 2016.

Last quarter, the company posted in-line earnings. It is worth noting that Quest Diagnostics has outperformed the Zacks Consensus Estimate in two out of the preceding four quarters with an average positive earnings surprise of 0.40%. Let’s see how things are shaping up prior to this announcement.

Factors at Play

With the last reported results, Quest Diagnostics saw the sixth consecutive quarter of organic revenue growth at an increasing rate. This also marked the third consecutive quarter of revenue per requisition growth in the last three years. It was a huge improvement from the 2% organic revenue decline in 2014 and subsequently our optimism for the company remains well positioned for the rest of 2016.

The upside was driven by the successful execution of the company’s strategy to grow its esoteric testing business and drive profitable growth. The upside is expected to continue in the soon-to-be-reported second quarter as well.

Over the recent past, Quest Diagnostics has witnessed significant growth through infectious disease testing, prescription drug monitoring and industry-leading wellness business. We expect these growth drivers to be active through the second quarter as well, benefiting the same metrics as in the preceding one.

This includes three newly introduced cancer test services that will provide clinically actionable insight into an individual's risk of developing hereditary forms of cancer. These tests will remain a 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 Safeway (Jun 2016), a leading food and drug retailer in the U.S., to offer diagnostic testing in 12 Safeway locations adding on to the two locations currently operating in Arizona through Quest's Sonora Quest Laboratories joint venture with Banner Health.

Further, its recent deal (May 2016) with HealthONE System of HCA Healthcare (NYSE:HCA) to enhance the quality and value of diagnostic services is also worth mentioning. Per the agreement, Quest Diagnostics will manage in-patient laboratory operations for six Denver-area hospitals in the HealthONE system.

We believe all these recent developments will start to contribute to the company’s top line from the second quarter itself. In addition, several new relationships with hospitals and integrated delivery networks were the other growth drivers.

On the flip side we note that, over the last two years, Quest Diagnostics has faced multiple reimbursement issues that affected its revenues. The company is highly disappointed with the recent CMS (Centers for Medicare & Medicaid Services)proposal related to Protecting Access to Medicare Act (PAMA). While reimbursement pressure will remain a moderate headwind even in the upcoming period, the company expects to more than offset that pressure through test and business mix.

The company currently expects its full-year 2016 revenues in the range of $7.52–$7.59 billion, reflecting annualized growth of 1.5%–2.5%. In addition, the company’s 2016 adjusted EPS expectation (excluding amortization expense) has been declared in the range of $5.02–$5.17.

Earnings Whispers

Our proven model does not conclusively show that Quest Diagnostics is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Quest Diagnostics has an Earnings ESP of 0.00%. That is because the Most Accurate estimate and the Zacks Consensus Estimate both are at $1.12.

Zacks Rank: Quest Diagnostics has a Zacks Rank #2 (Buy), which increases the predictive power of ESP. However, an ESP of 0.00% makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are two companies you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

AmSurg Corp. (NASDAQ:AMSG) has an Earnings ESP of +0.98% and a Zacks Rank #2.

The Cooper Companies Inc. (NYSE:COO) has an Earnings ESP of +2.64% and a Zacks Rank #2.