Quest Diagnostics, Inc.
DGX
, as part of its two-point strategy, has been focusing on areas with high potential. Yet, the soft industry trends leading to a low volume environment act as a dampener for the company. The stock currently carries a Zacks Rank #3 (Hold).
Over the past year, Quest Diagnostics has outperformed its
industry
. The stock has gained 13.3% against a 40.9% decline of the industry.
Quest Diagnostics’ legacy base business grew more than 19% in 2021, achieving record levels. In the fourth quarter, base testing volumes increased by more than 10% compared with the fourth quarter of 2019. Excluding acquisitions, total base testing volumes grew approximately 5% compared with 2019 and benefited from new PLS contracts that have increased over the last year.
The company raised its 2022 guidance based on the continued rebound in the base business. Recent investments are expected to accelerate growth.
Quest Diagnostics Incorporated Price
Quest Diagnostics Incorporated price
|
Quest Diagnostics Incorporated Quote
COVID-19 testing volumes moderated early in the fourth quarter, following the peak of the Delta wave in September but then surged again in early December as the Omicron variant spread across the United States. Quest Diagnostics reported nearly 7.9 million molecular tests and almost 73000 serology tests in the fourth quarter. Revenue per requisition increased 25.2% versus the prior year, largely driven by COVID-19 testing. The company performed an average of 1,20,000 COVID-19 molecular tests per day in the fourth quarter and maintained strong average turnaround times.
In terms of the Protecting Access to Medicare Act (PAMA), the company earlier noted that it is optimistic about the recent MedPAC report mandated under the LAB Act.
On the fourth-quarter earnings call, the company noted that the delay of the 2022 PAMA cuts announced last year proved beneficial for the industry and Medicare beneficiaries. Earlier, PAMA cuts of nearly $80 million were expected in 2022 but are now delayed by a year until 2023.
On the flip side, in the fourth quarter of 2021, Quest Diagnostics reported a year-over-year decline in revenues and adjusted earnings due to lower COVID-19 testing demand during the fourth quarter. Per the company’s preliminary fourth-quarter announcement in January, COVID-19 testing volumes in the fourth quarter, which included around 7.9 million molecular tests and 0.7 million serology tests, declined from the year-ago period.
The year-over-year contraction in margins is also worrying. The gross margin was 37.4%, reflecting a 488 basis points (bps) contraction from the year-ago figure. Adjusted operating margin of 20.5% showed a 690 bps contraction year over year.
Further, pressure on volume, owing to a difficult macro-economic situation and pricing, constitutes the primary risk for Quest Diagnostics.
Key Picks
A few better-ranked stocks in the broader medical space are
Henry Schein, Inc.
HSIC
,
McKesson Corporation
MCK
and
IDEXX Laboratories, Inc.
IDXX
.
Henry Schein has an estimated long-term growth rate of 11.8%. HSIC’s earnings surpassed estimates in the trailing four quarters, the average surprise being 25.5%. It currently has a Zacks Rank #2 (Buy). You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Henry Schein has outperformed the industry over the past year. HSIC has gained 34.8% compared with the industry’s 10.9% rise over the past year.
McKesson has a long-term earnings growth rate of 11.8%. MCK’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 20.6%, on average. It presently carries a Zacks Rank #2.
McKesson has outperformed the industry over the past year. MCK has gained 59.8% in the said period compared with 10.9% growth of the industry.
IDEXX has a long-term earnings growth rate of 13%. The company’s earnings surpassed estimates in the trailing four quarters, delivering an average surprise of 18.6%. IDXX currently has a Zacks Rank #2.
IDEXX has outperformed its industry in the past year. IDXX has gained 16.8% compared with the industry’s 1.2% growth in the same period.
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