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Can Quest Diagnostics (DGX) Pull a Surprise in Q2 Earnings?

Quest Diagnostics Inc. DGX is scheduled to report second-quarter 2017 earnings results before the opening bell on Jul 25.

Last quarter, the company beat the Zacks Consensus Estimate by 16 cents, delivering a positive earnings surprise of 13.68%. It is worth noting that Quest Diagnostics outperformed the Zacks Consensus Estimate in each of the preceding four quarters at an average of 5.15%. Let’s take a look at how things are shaping up prior to this announcement.

Factors at Play

Posing a threat to Quest Diagnostics’ revenue per requisition performance, the last reported first-quarter 2017 saw a 20-basis points (bps) decrease in the same. Moreover, we remain apprehensive, as the company’s two Professional Lab Services (PLS) engagement, WJ Barnabas Health and HealthONE System of HCA Holdings, Inc. (HCA) carry lower revenue per requisition due to the nature of work.

This apart, unit price headwinds had  less than 100 bps in the first quarter. While unit price headwinds stayed in moderate ranges (at approximately 1%) over the last few years, the company continues to expect the same for 2017 too.

Quest Diagnostics Incorporated Price and EPS Surprise


Also, over the last two years, Quest Diagnostics 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). However, while reimbursement pressure has likely acted as an overhang on performance in the to-be-reported quarter, the company expects to beat the pressure through test and business mix.

On a positive note, as observed in the reported first quarter of fiscal 2017, Quest Diagnostics seems to be determined to stimulate performance by adhering to its two-point growth strategy – Accelerate growth and Drive operational Excellence.

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

Also, in the recent past, Quest Diagnostics 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 second quarter as well, driving the same metrics as in the preceding quarter.

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

The company currently expects full-year 2017 revenues within the range of $7.64 billion to $7.72 billion (annualized growth of 2–3%). The current Zacks Consensus Estimate for revenues is pegged at $7.69 billion, close to the low end of the company’s guided range. In addition, the company’s 2017 adjusted earnings per share have been forecasted between $5.45 and $5.60. The Zacks Consensus Estimate of $5.56 is within this range.

Earnings Whispers

Our proven model does not conclusively show that Quest Diagnostics is likely to beat earnings this quarter. This 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 $1.41 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 #3, which increases the predictive power of ESP. However, an ESP of 0.00% makes surprise prediction difficult.

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

Stocks to Consider

Here are a few companies you may want to consider as our proven model shows that they have the right combination of elements to post an earnings beat this quarter:  

Becton, Dickinson and Company BDX has an Earnings ESP of +0.41% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology, Inc. ALGN has an Earnings ESP of +4.11% and a Zacks Rank #2.

Stryker Corporation SYK has an Earnings ESP of +0.66% and a Zacks Rank #2.

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Stryker Corporation (SYK): Free Stock Analysis Report
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