The Diagnosis for Quest Diagnostics: Strong Growth Ahead

Although Quest Diagnostics (NYSE:DGX) has been around for decades, its role as a global provider of clinical testing labs and services has been as prominent as ever this year. The New Jersey-based company has been quick to respond to the pandemic by offering fast coronavirus diagnostics and turning to innovation to enhance its testing capacity.

Quest's position on the front lines is likely to become even more important in the months ahead amid rising COVID-19 cases in many parts of the U.S. and Europe.

Beyond the unfortunate near-term catalyst, growth at Quest is expected to be driven by increasing demand for testing services that help identify a wide range of diseases. This along with the company's leading position and cost management discipline give Quest a solid profit growth outlook.

How Will Quest Diagnostics Benefit from COVID-19?

Quest has introduced several COVID-19 diagnostics and testing methods that have allowed more patients to be tested and results to come back faster. The company's coronavirus testing capacity has increased since the onset of the pandemic. It can now conduct 200,000 diagnostic and 200,000 antibody tests daily with an average result turnaround time of two days.

Late last month, Quest launched three new test options to help with the diagnosis of COVID-19 and differentiate the virus from other respiratory infections like the seasonal flu. The tests use a single specimen which makes for a faster diagnosis compared to methods that require the ordering of multiple tests.

Quest took things a step further when it recently announced the launch of a drone delivery program in conjunction with Walmart and drone company DroneUp. The pilot program in North Las Vegas and upstate New York is designed to enable at-home, self-collection COVID-19 tests via drone drop-off and pick-up.

What are Quest's Long-Term Growth Drivers?

Stepping outside the pandemic, Quest is finding new ways to set itself up for long-term growth by introducing new products and establishing strategic relationships. In August, it formed a partnership with health insurance provider Anthem to work on a series of initiatives to improve health care efficiencies, lower costs, and improve the consumer experience.

Earlier this summer Quest launched an automated next generation sequencing (NGS) engine that allows people to access genetic testing for inherited diseases such as cancer through AncestryHealth, the genetic testing arm of Ancestry.com.

Quest also recently acquired Mid America Clinical Laboratories (MACL), which provides lab management services to about 30 hospitals in Indiana to expand its growing presence in the Midwest region.

Although the growth brought upon by the pandemic is unlikely to be sustained, Quest is expected to generate high single digit earnings growth over the next several years.

Quest holds the largest market share in the $28 billion independent lab segment of the U.S. laboratory market with a narrow lead on its main competitor Laboratory Co. of America. Beyond the two leaders, the space is highly fragmented, so Quest will be on a quest to further consolidate and capture inorganic growth opportunities. And with many hospital laboratories under increasing financial pressure, there will also be opportunities for Quest to partner with hospital systems across the country.

Quest and Lab Corp should also benefit from some recent good news on the Medicare front. The Centers for Medicare and Medicaid Services (CMS) recently announced updated reimbursement levels for COVID nasal swab testing. Effective January 1^st, 2021, Medicare will reimburse for COVID-19 testing at $75 and bump reimbursement to $100 for labs that process the tests in less than two days.

Will Quest Diagnostic's Beat Q3 Earnings Expectations?

After posting better than expected results in the first half of 2020, Quest is on pace for earnings growth north of 20% this year. The recent product launches, partnerships, and rising COVID-19 testing demand suggest we are in store for some strong quarterly reports.

Last quarter, Quest's cost management helped drive operating expenses lower by 6% and produce a convincing earnings beat. Investors can expect the third quarter report to have a similar tone when the company reports before the open on October 22^nd.

The consensus estimate for third quarter earnings per share is $3.58 which is more than double what the company reported in the third quarter of 2019. And if the run-up in Quest's stock ahead of earnings are any indication, the consensus forecast may once again get surpassed.

Quest's stock is carrying a nine-day winning streak into the October 22^nd report which has brought its relative strength indicator (RSI) reading to a sky-high 98. But while the RSI and building expectations may be setting us up for a post-earnings pullback, Quest's valuation suggests the long-term trajectory will be up.

At 14x forward earnings Quest Diagnostics is still attractively valued relative to its sector and the broader market. As the company continues to exert its leadership position in the U.S. diagnostics market, the results are likely to be infectious growth and P/E multiple expansion.