Will Quest Diagnostics (DGX) Disappoint In Q3 Earnings?

Quest Diagnostics Inc. (NYSE:DGX) is scheduled to report third-quarter 2017 earnings results before the opening bell on Oct 19.

Last quarter, the company surpassed the Zacks Consensus Estimate by 14 cents delivering a positive earnings surprise of 9.9%. Also, Quest Diagnostics outperformed the Zacks Consensus Estimate in all trailing four quarters with an average beat of 7.1%.

Let’s take a look at how things are shaping up prior to this announcement.

Factors at Play

After several quarters of sustained drag in the company’s revenue per requisition performance,last quarter saw a slight rebound. However, it still remains to be seen if this improvement is here to stay or not. The company’s two Professional Lab Services (PLS) engagements — WJ Barnabas Health and HealthONE System of HCA Holdings, Inc. (HCA) — carry lower revenue per requisition due to the nature of work.

Overall, we believe that a low level of employment and slow growth of commercially-insured lives will continuously impact the company’s volume (measured by the number of requisitions) environment till the economy turns around for better.

Quest Diagnostics Incorporated Price and EPS Surprise

Quest Diagnostics Incorporated price-eps-surprise | Quest Diagnostics Incorporated Quote

This apart, unit price headwinds were less than 100 bps in the previously reported second quarter. While unit price headwinds hovered in moderate ranges (at approximately 1%) over the last few years, the company continues to expect the same for the rest of 2017 too.

Also, over the last two years, Quest Diagnostics has faced several reimbursement issues that affected its revenues. The company is concerned about the CMS (Centers for Medicare & Medicaid Services) proposal related to Protecting Access to Medicare Act (PAMA). We believe, reimbursement pressure will be reflected as an overhang in the company’s performance this soon-to-be-reported quarter too.

Notably, the company has not positively taken the latest Centers for Medicare and Medicaid Services (CMS) publication of proposed 2018 Medicare reimbursement rates for clinical laboratory tests under the Clinical Lab Fee Schedule (CLFS). However, this leaves no impact on its yet-to-be-reported quarter’s revenue numbers.

On a positive note, Quest Diagnostics seems to be determined to repeat its well-meaning efforts from second-quarter 2017 by stimulating the company’s performance via a two-point growth strategy to accelerate growth and drive operational excellence.

We are also optimistic about the company’s successful execution of its strategy to grow esoteric testing business and drive profitable growth.

Additionally, Quest Diagnostics has recently witnessed significant growth through infectious disease testing, prescription drug monitoring and industry-leading wellness business. We expect these growth drivers to remain active through the third quarter as well, driving the same metrics as in the preceding quarter.

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

The company currently expects full-year 2017 revenues in the range of $7.69-$7.74 billion (annualized growth of 2.6-3.4%). The current Zacks Consensus Estimate for revenues is pegged at $7.7 billion, just above the lower-end of the guided range.

In addition, the company’s 2017 adjusted EPS range remains at $5.62-$5.72. The Zacks Consensus Estimate of $5.65 is within this range.

Earnings Whispers

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

Zacks ESP: Quest Diagnostics has an Earnings ESP of -2.52%. This is because the Most Accurate estimate of $1.33 is pegged lower than the Zacks Consensus Estimate of $1.37. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Quest Diagnostics has a Zacks Rank #4 (Sell), which decreases the predictive power of ESP. Combined with a negative ESP, Quest Diagnostics’ chances of an earnings beat can not be conclusively predicted.

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

Stocks to Consider

Here are a few stocks worth considering from the same space as our proven model shows them to comprise the right combination of elements to beat estimates this quarter:

The Cooper Companies, Inc. (NYSE:COO) has an Earnings ESP of +0.62% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) has an Earnings ESP of +6.84% and a Zacks Rank #1.

Humana Inc. (NYSE:HUM) has an Earnings ESP of +1.39% and a Zacks Rank of 1 as well.

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