Is Quest Diagnostics Stock a Smart Addition to Your Portfolio Now?

Quest Diagnostics Inc.’s DGX robust Advanced Diagnostics offering is poised to drive its growth in the upcoming quarters. Strength in the company’s core business is highly encouraging. Additionally, a strong focus on cost discipline bodes well for the stock. However, mounting debt and lower COVID-19 revenues are concerns for Quest Diagnostics’ operations.

In the past year, this Zacks Rank #2 (Buy) stock has increased 20.8% compared with the industry’s 29.4% growth and 33.7% growth of the S&P 500 composite.

The renowned provider of diagnostic information services has a market capitalization of $17.88 million. Quest Diagnostics has an earnings yield of 5.55% compared with the industry’s yield of 3.45%. The company’s earnings surpassed estimates in all the trailing four quarters, delivering an average surprise of 4.92%.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

DGX’s Tailwinds

Strong Potential of Advanced Diagnostics: Quest Diagnostics’ highly specialized Advanced Diagnostics portfolio is growing, driving a favorable test mix and growth in test per requisition for the company. Within brain health, AD-Detect blood-based Alzheimer’s disease testing has been the key driver, while growth in women’s health is driven by prenatal and hereditary genetic testing. Robust testing demand in genital tract infections, which includes several STIs, is also observed.

In the cardio-metabolic health space, there is growing interest in several biomarkers that improve early detection of cardiovascular and metabolic diseases like diabetes and kidney disease. The acquisition of Haystack Oncology has strategically placed Quest Diagnostics in the higher-growth clinical area of ctDNA (Circulating tumor DNA) solid-tumor MRD (minimal residual disease) testing. The Haystack MRD test is set to be available nationally to providers in the fourth quarter of 2024.

Growth Momentum in the Base Business Continues: The third quarter of 2024 marked another strong base business growth for Physician Lab Services, driven by new customer wins and expanded business due to increased utilization of the company’s Advanced Diagnostics. Acquisitions also contributed to the channel’s growth. Added to this, Quest Diagnostics delivered strong volume and revenue growth from its Medicare Advantage plans.

In Hospital Lab Services, Quest Diagnostics is posting growth above historical levels, supported by dynamics that lead to strong continued demand for reference testing. Further, Quest Diagnostics’ strong consumer focus is helping it to capture growing opportunities in consumer-initiated testing and demand for expanded access to basic health care. The questhealth.com platform reported 40% growth in total revenues.

A Strategic Imperative to Drive Operational Excellence: As part of its broader strategy to drive operational improvements across the business, Quest Diagnostics strategically deploys automation and AI to improve quality, service, efficiency and the workforce experience. The company’s multi-year cost excellence program, Invigorate, has consistently delivered 3% annual cost savings and productivity enhancements, acting as a shield against inflationary pressures such as rising labor and benefit costs and reimbursement challenges.

In the third quarter, the company completed the build-out of full end-to-end automation for its core routine tests at its Lenexa, KS, laboratory. This makes it the third fully automated lab in Quest Diagnostics’ national network. It is also piloting automated specimen accessioning in its Clifton lab to increase productivity in specimen processing and improve quality.

Factors Weighing on DGX

Escalating Debt Level: The company’s solvency level remains a concern. At the end of the third quarter of 2024, long-term debt in the balance sheet was $5.65 billion, while the cash and cash equivalent balance was only $764 million. The current portion of the debt stood much higher at $603 million.

Runoff of COVID-19 Testing Revenues Drag the Top Line: The transition away from COVID-19 testing presented challenges for the company in 2023. Revenues from testing volumes have continued to nosedive, plunging nearly 85% last year and affecting some key metrics’ performance. Quest Diagnostics’ 2024 outlook indicates a $175 million decline in COVID-19 revenues, partially offsetting the growth from the base business.

DGX Stock Estimate Trend

The Zacks Consensus Estimate for Quest Diagnostics’ 2024 earnings per share (EPS) has remained constant at $8.89 in the past 30 days.

The consensus estimate for the company’s 2024 revenues is pegged at $9.79 billion. This suggests 5.8% growth from the year-ago reported number.

Other Key Picks

Some other top-ranked stocks in the broader medical space are Haemonetics HAE, Boston Scientific (BSX) and Penumbra PEN.

Haemonetics has an earnings yield of 5.02% compared to the industry’s 1.18% yield. Haemonetics’ earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 19.39%. Its shares have risen 20.3% against the industry’s 7.3% decline in the past year.

HAE carries Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Boston Scientific, carrying a Zacks Rank #2 at present, has a long-term estimated earnings growth rate of 13.8%. Shares of the company have rallied 64.3% compared to the industry’s 26.5% gain. BSX’s earnings surpassed estimates in three of the trailing four quarters and missed in one, the average surprise being 2.82%.

Penumbra, carrying a Zacks Rank #2 at present, has an estimated earnings growth rate of 33.5% for 2024, compared with the industry’s 15.9%. Shares of Penumbra have risen 9.9% compared to the industry’s 23.4% growth over the past year. PEN’s earnings surpassed estimates in three of the trailing four quarters and missed in one, the average surprise being 10.54%.

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