Here’s Why Quest Diagnostics Stock Should Be in Your Portfolio

Key Points

• Quest Diagnostics top and bottom lines have both fallen as COVID testing revenues decline with the pandemic in the rearview mirror, but its base business is still growing at 5% YoY
• Quest shares a duopoly with LabCorp for diagnostic lab testing
• The pandemic has brought preventative and routine healthcare to the forefront which means more diagnostic tests and monitoring with the aging population over pre-pandemic levels
• Quest reported a strong Q3 2022 beating EPS estimates by $0.18 and raising both top and bottom-line guidance for full-year 2022 indicating the normalization process may finally be over  
• Quest shares are trading at 14.8X forward earnings with a $1.83% dividend yield

Medical diagnostic lab company Quest Diagnostic NYSE: DGX stock has been trading within a boxed range from $126 to $146 for the majority of 2022. The Company was instrumental during the early days of the pandemic providing very high volume and high demand COVID pcr testing services. With the pandemic in the rearview mirror, the retraction in COVID related revenues is part of the normalization process. Revenues continue to decline, but the baseline appears to be rising with other testing services. Quest services nearly half the hospitals in the country including HCA Healthcare NYSE: HCA and shares a duopoly with its rival LabCorp NYSE: LH. The stock is both a defensive play during economic headwinds including inflation and supply chain disruption and an offensive long-term play on the aging population.

Pandemic Lifestyles Changes

The relief of COVID has allowed for the resurgence of outpatient services, preventative care, and routine blood testing. This has helped to somewhat mitigate the pandemic hangover but more importantly complete the normalization process which still portends growth compared to the pre-pandemic 2019 levels. The pandemic has brought healthcare into the forefront especially for those at most risk with chronic diseases like diabetes and cardiovascular. It’s made people more aware of importance of monitoring their health which absolutely requires routine blood tests. This along with the aging population should help Quest continue its long-term upward trajectory. Demand for its diagnostic testing services will only grow as people implement regular testing into their lifestyles.

Here’s What the DGX Weekly Chart Says

For the majority of 2022, DGX stock had been oscillating in a 20-point boxed range between $126 and $146. The stock fell through the bottom of the range to $120.40 lows heading into its Q3 2022 earnings report, which was surprisingly strong, and they also raised their guidance. This launched shares through the $126.29 weekly MSL trigger to spike through the weekly 20-period exponential moving average (EMA) and the 50-period MA to retest the 146.25 upper box range for a potential triple top. The volume oscillator has historically peaked and reversed at the 10% mark preceding reversals in the stock price. It is once again back just above the 10% mark awaiting either a breakout through the upper boxed range or once again fail and fall back down on a triple top. There is the possibility of a cup-and-handle breakout if DGX stock only pullbacks to and bounces off the $139.61 support through the $146.26 resistance on heavy volume. If not, then watch the $130.84 support and the $126.29 bottom of the boxed range and weekly MSL trigger support to consider scooping up shares.

Earnings Blast-Off

On Oct. 20, 2022, Quest released its fiscal third-quarter 2022 results for the quarter ending September 2022. The Company reported an adjusted earnings-per-share (EPS) profit of $2.36 excluding non-recurring items versus consensus analyst estimates for a profit of $2.18, beating estimates by $0.18. Revenues fell (-10.4%) year-over-year (YOY) to $2.49 billion, still beating analyst estimates for $2.34 billion. These numbers were impressive considering the impact of Hurricane Ian. The Company did caution that the Laboratory Services Act Salsa would fix PAMA resulting in a Medicare fee schedule reduction of $80 million to $90 million in 2023. This would affect both Quest and LabCorp.

Base Business is Still Growing

Quest CEO-elect summed it up perfectly, "We accelerated growth in the base business in the third quarter, with a strong performance across much of the country. Our base business revenue grew five percent year-over-year in the third quarter, with performance rebounding in August and September from the softer volume trends we saw earlier in the year. At the same time, we continued to invest in advanced diagnostics and consumer-initiated testing while managing our cost structure to help offset inflationary pressures and declining COVID-19 volumes. Congress has already acted three times to prevent further cuts and the Company hopes they may intervene again.

Good Times Ahead

Quest upped its fiscal full-year 2022 EPS guidance between $9.75 to $9.95 versus $9.68 consensus analyst estimates and previous guidance range of $9.55 to $9.95. Revenues are expected between $9.72 billion to $9.86 billion versus $9.67 billion consensus analyst estimates and prior guidance between $9.50 billion to $9.75 billion. This is the second consecutive quarter that Quest has raised its guidance from earlier estimates and beyond consensus analyst estimates. This is more proof that the normalization process may be over.