Diagnostic testing provider Quest Diagnostics Incorporated (DGX) in Madison, N.J., offers diagnostic information and risk assessment services primarily under the Quest Diagnostics, ExamOne, Dermpath Diagnostics, and Quanum brand names. 

Although recovery from the pandemic caused a slowdown in its COVID-19 testing business in the first half of the year, the company has been seeing an uptick in testing lately with the rapid spread of the more contagious coronavirus Delta variant across the U.S. Consequently, its share price has soared 8% over the past month.

While a faster than expected recovery in DGX’s base business could normalize its operations, further growth may be challenging for the company, given the rising competition in the diagnostics market.

Click here to checkout our Healthcare Sector Report for 2021

Here is what we think could influence DGX’s performance in the coming months:

Strategic Collaboration

This month, CLX Health and DGX decided to collaborate to offer access to molecular diagnostic testing for COVID-19 for international travelers and live event attendance. Through their TrustAssure platform, appointments can be booked directly for COVID-19 molecular diagnostic testing at select DGX’s patient service centers across the U.S. The move  should allow  DGX to provide individuals access to testing in key markets across the nation.

Competitive COVID-19 Diagnostics Market

Increasing government initiatives focused on implementing mass coronavirus testing and a growing demand for at-home testing have substantially increased the size of the COVID-19 diagnostics market. As such, key players, such as Laboratory Corporation of America Holdings (LH) and Abbott Laboratories (ABT), have been accelerating the production and supply of  molecular rapid testing kits to grab lucrative market opportunities and expand their footprints globally. The resurgence of COVID-19 cases globally due to the Delta variant’s rapid spread is expected to increase competition in the COVID-19 testing market significantly. This could negatively impact DGX’s  market share and testing revenue.

Mixed Growth Potential

A $9.45 billion consensus revenue estimate for DGX’s fiscal year 2021 represents a slight increase year-over-year. But the company’s revenue is expected to decrease 10.4% from the prior-year quarter to $8.46 billion next year. Analysts expect DGX’s EPS to rise 101.4% year-over-year to $2.86 in the current quarter, ended June 2021. However, its EPS is estimated to decline 46.4% next quarter and 28.1% next year. Also, it is expected to decrease at an 8.7% rate  per annum over the next five years.

Mixed Financials

DGX’s net revenue increased 39.5% year-over-year to $2.55 billion for the second quarter ended June 30, 2021. Its operating income increased 88.4% year-over-year to $533 million, while its net income surged 240.5% from the prior-year quarter to $631 million. Its EPS came in at $4.96, representing a 264.2% increase year-over-year. But DGX’s total operating costs and expenses rose 30.6% from the prior-year quarter to $2.02 billion over this period. Its cash and cash equivalents declined 43.3% year-over-year to $560 million for the six months ended June 30, 2021. As of June 30, 2021, its long-term debt stood at $4.01 billion.

The company’s 41.7% trailing-12-month gross profit margin is 24% lower than the 54.9% industry average.

Consensus Rating and Price Target Indicate Potential Upside

Of the 14 Wall Street analysts that have provided ratings for the stock, six rated it Buy, and six rated it Hold. Currently trading at $139.96, analysts expect the stock to hit $145.5 in the near term, indicating a 4% potential upside. The price targets range from a low of $130 to a high of $158.

POWR Ratings Reflect Uncertainty

DGX has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. DGX has a C grade for Growth and Stability. The stock’s mixed growth prospects and a relatively high 1.03 beta  justify these grades.

In terms of Value Grade, DGX has a B. The company’s 12.42 non-GAAP P/E ratio , which is 47.4% lower than the 23.61 industry average, is consistent with the value grade.

Beyond the grades we’ve highlighted, one can check out additional DGX ratings for Sentiment, Momentum, and Quality here. In addition, DGX is ranked #15 of 55 stocks in the D-rated Medical – Diagnostics/Research industry.

Click here to view the top-rated stocks in the Medical – Diagnostics/Research industry.

Bottom Line

While a significant surge in the COVID-19 testing business has been driving up the shares of DGX, growing competition from prominent industry players could cause the stock to lose momentum or suffer a pullback in the near term. Furthermore, the company’s heavy debt burden and mixed growth prospects could add to investors’ concerns surrounding the stock. So, we think investors should wait for some improvement in DGX’s  prospects before investing in the stock.

Click here to checkout our Healthcare Sector Report for 2021

DGX shares were unchanged in premarket trading Wednesday. Year-to-date, DGX has gained 19.10%, versus a 18.19% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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