Quest Diagnostics Research Report Updated - Analyst Blog

On May 16, 2014, we issued an updated research report on Quest Diagnostics, Inc. DGX – a major commercial laboratory services provider. The current market environment continues to pose challenges in the form of lower healthcare utilization and Medicare cuts. In addition, pressure on volume and pricing constitute the primary risk for Quest Diagnostics. However, we are positive on current favorable demographic trends.

The company recently reported poor first-quarter 2014 results. The quarter's adjusted earnings per share from continuing operations of 84 cents missed both the Zacks Consensus Estimate and the year-ago number by 5.6%. On the other hand, though revenues from continuing operations dropped 2.3% year over year to $1.75 billion, the figure came in line with the Zacks Consensus Estimate.

Concerns also loom large with regard to an average 2014 revenue outlook, indicating that the industry trend does not seem likely to improve in the near future. Although we hold a favorableview on the company's massive organizational restructuring strategy, implemented since Jan 2013 to increase operational efficiency and restore growth, near-term visibility remains a matter of concern.

Nevertheless, of late, Quest Diagnostics has been focusing on high-potential areas such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. As part of this strategy, the company acquired Summit Health and Solstas Lab Partners Group this year. These deals are consistent with Quest Diagnostics' aim of becoming a global leader in diagnostic and healthcare services.

We are also upbeat about the long-term growth drivers which are expected to reflect positive outcomes in the upcoming period. With baby boomers increasingly moving into Medicare, the company should benefit from continued population growth and favorable demographics. Over the long haul, we expect Quest Diagnostics, as a provider of low-cost diagnostic information services, to be able to garner greater growth in this high-potential but still under-penetrated niche market. The stock currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better-ranked stocks in the broader healthcare space that are worth a look include Masimo Corporation MASI, Natus Medical Inc. BABY and Accuray Incorporated ARAY. All of these three stocks carry a Zacks Rank #2 (Buy).

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