Credit: Shutterstock photoQuest Diagnostics Inc.DGX is scheduled to report its third-quarter 2015 earnings results before the opening bell on Oct 22.
Last quarter, Quest Diagnostics had delivered a positive earnings surprise of 0.81%. Notably, the company has outpaced the Zacks Consensus Estimate in all of the trailing four quarters with an average beat of 2.12%. Let's see how things are shaping up prior to this announcement.
Factors at Play
With the last reported quarterly results, Quest Diagnostics saw the third consecutive quarter of organic revenue growth. The second quarter also marked the first in the last three years to have witnessed revenue per requisition growth. The upside came on the improved performance of the regional sales team and the launch of several clinical franchise solutions including BRCA, CardioIQ, Noninvasive Prenatal Screening and HIV fourth generation testing. Prescription drug monitoring also exhibited growth. We expect these growth drivers to be active through the third quarter as well, benefiting the same metrics as in the preceding quarter.
We are also optimistic about Q2 Solutions - the joint venture (JV) formed by Quest Diagnostics and Quintiles in the last quarter. The JV, aimed at combining the competencies of the two industry leaders in clinical trials laboratory operations, should start generating better growth and profitability from the combined business compared to the operations of Quest Diagnostics as a standalone entity. Management expects that over time, this JV will accelerate growth, achieve cost synergies and be accretive to Quest Diagnostics' clinical trials testing business. We expect the benefits to start reflecting from the third quarter itself.
Another recent collaboration with leading technology company, Inovalon Holdings, Inc., to advance health care management and partake in the industry's transition from volume- to value-based healthcare also looks promising.
Over the last two years, Quest Diagnostics has faced multiple reimbursement issues that weighed on its revenues. However, the company has been observing consistent growth in its Medicaid volumes. Initially, management was expecting to see a turnaround in the reimbursement scenario with less government pressure on the clinical lab fee schedule. However, the Centers for Medicare & Medicaid Services' recently released preliminary proposal for a massive pricing overhaul for clinical diagnostics in 2017 may create uproar.
Meanwhile, on the healthcare utilization front, the company is encouraged by the process of adding more insured lives to the healthcare system as a result of the Affordable Care Act. This, in turn, is expected to shoot up the company's test volume in the near term.
Moreover, Quest Diagnostics has shown marked improvement on the back of its multi-year Invigorate cost-reduction initiatives, which helped the company mitigate some of the bottom-line pressures. The program remains on track to deliver the expected cost savings in 2015.
However, with a declining trend in the average market price over the last couple of years, pricing pressure has been a consistent headwind for Quest Diagnostic. Management currently expects price erosion in 2015 to be similar to that observed in 2014.
The company currently expects 2015 revenues to increase by 2% to 3% over 2014 adjusted levels (excludes clinical trials revenue reported in the third and fourth quarter of 2014) to reach $7.49-$7.57 billion. In addition, the company's 2015 adjusted EPS expectation (excluding amortization expense) is reiterated in the range of $4.70 to $4.85.
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 both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at $1.27.
Zacks Rank: Quest Diagnostics has a Zacks Rank #2 (Buy) which increases the predictive power of ESP. However, a 0.00% ESP 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. Ordeal
Stocks to Consider
Here are some companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat in the upcoming quarter:
ICON Public Limited Company ICLR , earnings ESP of +1.00% and a Zacks Rank #1.
Masimo Corporation MASI , earnings ESP of +3.23% and a Zacks Rank #1.
Thermo Fisher Scientific, Inc. TMO , earnings ESP of +1.12% and a Zacks Rank #2.
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QUEST DIAGNOSTC (DGX): Free Stock Analysis Report
THERMO FISHER (TMO): Free Stock Analysis Report
MASIMO CORP (MASI): Free Stock Analysis Report
ICON PLC (ICLR): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
