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Quest Diagnostics (DGX) Gains From New M&As Amid Competition

Quest Diagnostics DGX is gaining from strong customer relationships, broad health plan access and advanced diagnostics offerings. The robust M&A landscape is highly promising. However, declining testing revenues and competitive pressure in the industry appear challenging for the company’s operations. The stock carries a Zacks Rank #3 (Hold) currently.

Quest Diagnostics has been experiencing robust volume growth in its core business on increased demand for its services, driven by collaborations with health plans, hospitals and physicians. Additionally, the company is benefiting from the ongoing return to care. In 2023, the company’s strong ties with health plans played a crucial role in its growth, resulting in a significant increase in revenues from health plans compared to the last year. Base business revenues increased nearly 6% in the first quarter of 2024. Given its strong commercial focus on physicians and hospitals and broad health plan access, Quest Diagnostics can capitalize on the sustained high healthcare utilization rates and can continue driving new customer growth.

In Physician Lab Services, Quest Diagnostics has been benefiting from the broad-based return to care, overall market growth and share gains driven by the competitive strength of its scale and innovative offerings. In the first quarter of 2024, the base business growth was driven by new customer wins and strong relationships with physician practices, including large multi-specialty physician groups and those owned by large retailers. With approximately 90% of health plan members in the United States having access to its laboratory services, the company's broad health plan access has been a key driver of its success in the physician channel.

Additionally, Quest Diagnostics is making headway with several promising opportunities in its robust M&A pipeline, with the recent acquisition of Lenco contributing to its first-quarter growth. Base volume growth within Hospital Lab Services will continue, courtesy of the strength in professional laboratory services and hospital reference testing that has been outpacing both historical trends and market growth projections. The company has made promising strides with its most recent Professional Lab Services (PLS) relationships, including Northern Light Health, Lee Health and Tower Health, two of which were concluded in the fourth quarter of 2023. With a funnel of hospital outreach acquisition opportunities, the company is poised to deliver accessible and affordable laboratory testing that can help health systems improve productivity and patient care.

Quest Diagnostics Incorporated Price

Quest Diagnostics Incorporated Price
Quest Diagnostics Incorporated Price

Quest Diagnostics Incorporated price | Quest Diagnostics Incorporated Quote

On the flip side, the rapid transition away from COVID-19 testing continues to present challenges for the company. Revenues from testing volumes continued to nosedive, plunging nearly 85% in 2023 and affecting some key metrics.  Quest Diagnostics’ 2024 outlook also indicates a $175 million decline in COVID-19 revenues, partially offsetting the growth from the base business.

Quest Diagnostics also faces intense competition, primarily from LabCorp, other commercial laboratories and hospitals. While pricing is an important factor in choosing a testing lab, hospital-affiliated physicians expect a higher level of service, including an accurate and rapid turnaround of testing results. As a result, Quest Diagnostics and other commercial labs compete with hospital-affiliated labs primarily based on the quality of service.     

Further, amid the continuing evolution of the healthcare industry, the company’s operations are exposed to several inherent risks, such as fluctuations in healthcare utilization rate, softer testing volumes, commercial pricing pressure and reimbursement headwinds. Healthcare market participants, including governments, are focused on controlling costs and have adopted several cost control approaches, including reducing reimbursement for healthcare services, changing reimbursement methodology for healthcare services and changing medical coverage policies denying coverage for services. This pressure to control healthcare costs also poses a challenge to the company.

Key Picks

Some better-ranked stocks in the broader medical space are Him & Hers Health HIMS, Medpace MEDP and ResMed RMD. While Hims & Hers Health sports a Zacks Rank #1 (Strong Buy), Medpace and ResMed carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks Rank #1 stocks here.

Hims & Hers Heath stock has surged 165.9% in the past year. Estimates for the company’s earnings have moved upward from 18 cents to 19 cents for 2024 and from 33 cents to 35 cents for 2025 in the past seven days.

HIMS’ earnings beat estimates in three of the trailing four quarters and missed in one, delivering an average surprise of 79.2%. In the last reported quarter, it posted an earnings surprise of a staggering 150%.

Estimates for Medpace’s 2024 earnings per share have remained constant at $11.29 in the past 30 days. Shares of the company have surged 81.9% in the past year compared with the industry’s 5% growth.

MEDP’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 12.8%. In the last reported quarter, it delivered an earnings surprise of 30.6%.

Estimates for ResMed’s fiscal 2024 earnings per share have remained constant at $7.70 in the past 30 days. Shares of the company have declined 1.6% in the past year compared with the industry’s fall of 1.7%.

RMD’s earnings surpassed estimates in three of the trailing four quarters and missed in one, the average surprise being 2.8%. In the last reported quarter, it delivered an earnings surprise of 10.9%.

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