Quest Diagnostics (DGX) Q3 Earnings: A Surprise In Store?

Quest Diagnostics Inc. (NYSE:DGX) is scheduled to report third-quarter 2016 earnings results before the opening bell on Oct 20, 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 0.77%. Let’s see how things are shaping up prior to this announcement.

Factors at Play

With the last reported results, Quest Diagnostics saw the seventh consecutive quarter of organic revenue growth at an increasing rate. This also marked the fourth 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, we remain optimistic about the company’s performance in the second half of 2016.

The upside was backed by the successful execution of the company’s strategy to grow its esoteric testing business and drive profitable growth. This trend is expected to continue in the to-be-reported 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 third quarter as well, benefiting the same metrics as in the preceding one.

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.

Additionally, last month, the company announced the launch of Zika Antibody Test Service based on the Centers for Disease Control and Prevention’s (CDC) Zika MAC-ELISA. Notably, Quest Diagnostics was the first commercial laboratory to receive FDA emergency use authorization for a Zika test for the qualitative detection of RNA from Zika virus in human serum specimens.

We are also looking forward to the company's 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.

Additionally, noteworthy are the company’s partnerships with information and technology-enabled health services business Optum (Sep 2016), and leading food and drug retailer Safeway (Jun 2016). Notably, Safeway’s alliance enabled Quest Diagnostics to offer diagnostic testing in 12 Safeway locations in Arizona through Quest's Sonora Quest Laboratories joint venture with Banner Health. Last month, Quest Diagnostics announced the opening of six new Sonora Quest Laboratories Patient Service Centers (PSCs) throughout Arizona.

We believe all these recent developments will significantly contribute to the company’s top line in the third quarter. 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.

Also, it still remains a big question whether the volume improvement in recent times is sustainable. We should take into consideration that price headwinds persisted in the quarter − down slightly less than 1%. Further, Professional Lab Services, Barnabas Health and HCA carried lower revenue per requisition.

The company currently expects full-year revenues in the range of $7.47–$7.54 billion compared to the earlier range of $7.52–$7.59 billion, reflecting flat to 1% increase over 2015 revenues (growth of 1.5%–2.5%). In addition, the company’s 2016 adjusted EPS expectation remains in the range of $5.02–$5.17 (unchanged from the previous expectation). The Zacks Consensus Estimate of $5.10 remains within the guided range.

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 $1.35.

Zacks Rank: Quest Diagnostics has a Zacks Rank #3, which increases the predictive power of ESP. However, an ESP of 0.00% makes surprise prediction difficult.

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:

Edwards Lifesciences Corp. (NYSE:EW) has an Earnings ESP of +2.94% and a Zacks Rank #2.

ICU Medical, Inc. (NASDAQ:ICUI) has an Earnings ESP of +6.32% and a Zacks Rank #2.You can see the complete list of today’s Zacks #1 Rank stocks here.

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