Quest Diagnostics Inc. (DGX Quick QuoteDGX - Free Report) is scheduled to report first-quarter 2017 earnings results before the opening bell on Apr 20.

Last quarter, the company topped the Zacks Consensus Estimate by 4 cents, delivering a positive earnings surprise of 3.15%. It is worth noting that Quest Diagnostics outperformed the Zacks Consensus Estimate in each of the preceding four quarters with an average positive earnings surprise of 1.73%. Let’s see how things are shaping up prior to this announcement.

Factors at Play

After a drag in Quest Diagnostics’ revenue per requisition performance, the last reported fourth-quarter 2016 registered a 40 basis points (bps) increase in the same. However, we are not much hopeful about the sustainability of this growth as the company’s 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 headlands were less than 50 bps in the fourth quarter and approximately 70 bps for the full year. While unit price headlands moderated in the second half of 2016, the company continues to believe that in 2017 they will be consistent with last few years at approximately 1%. This may get reflected from the first quarter onward.

Quest Diagnostics Incorporated Price and EPS Surprise

 

Quest Diagnostics Incorporated Price and EPS Surprise | Quest Diagnostics Incorporated Quote

The company is also apprehensive about a difficult comparison during the first-quarter results. According to Quest Diagnostics, it benefited from favorable weather and an extra day due to the leap year in the first quarter of 2016. This sets up a difficult comparison for the to-be-reported quarter. The company believes, this quarter earnings growth will not be proportional to the rest of the quarters. It expects a back-half loaded performance for full-year 2017.

Also, over the last two years, Quest Diagnostics faced multiple reimbursement issues that affected its revenues. The company is highly disappointed with the recent CMS (Centers for Medicare & Medicaid Services) proposal related to Protecting Access to Medicare Act (PAMA). While reimbursement pressure will continue to remain an overhang on results in the to-be-reported quarter, the company expects to more than offset that pressure through test and business mix.

However, upside may come from successful execution of the company’s strategy to grow its esoteric testing business and drive profitable growth.

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 have been active through the first quarter as well, benefiting the same metrics as in the preceding quarter.

At the end of 2016, the company opened patient service centers in 56 Safeway supermarkets. Quest Diagnostics also become Ancestry's first CLIA approved lab partner to provide DNA testing, enabling Ancestry DNA subscribers to build their family based on the origins. It has already started to perform genetic testing for AncestryDNA in Marlborough Massachusetts laboratory.

We believe all these recent developments will significantly contribute to the company’s top line in the first quarter. In addition, several new relationships with hospitals and integrated delivery networks were the other growth drivers.

In this regard, we note that Quest Diagnostics outperformed the Zacks categorized Medical - Outpatient and Home Healthcare industry with respect to price movement over the past three months. With a series of catalysts to boost growth, we expect the trend to continue in the coming days as well.

The company currently expects full-year 2017 revenues to be 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 $7.67 billion, close to the lower end of the company’s guided range. In addition, the company’s 2017 adjusted earnings per share have been forecasted between $5.37 and $5.52. The Zacks Consensus Estimate of $5.75 remains 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 $1.18. 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 #2, which increases the predictive power of ESP. However, an ESP of 0.00% makes surprise prediction difficult.

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

Applied Materials, Inc. (AMAT Quick QuoteAMAT - Free Report) has an Earnings ESP of +1.32% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Chemours Company (CC Quick QuoteCC - Free Report) has an Earnings ESP of +4.08% and a Zacks Rank #1.

Hill-Rom Holdings, Inc. has an Earnings ESP of +1.27% and a Zacks Rank #2.

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