Morningstar | Quest Diagnostics Delivers Strong Volume Growth in 2Q; Our FVE Remains Unchanged
Quest Diagnostics’ solid second-quarter performance generally fell in line with our expectations, and the firm remains on track with our projections for the year. Our fair value estimate is unchanged. We were particularly pleased to see organic quarterly volume growth up 2.9%. This continues the robust volume growth we saw in the first quarter and puts volume in 2019 on firm footing compared with 2018. We view these volume gains as a positive factor reinforcing Quest’s narrow economic moat, which stems primarily from its compelling cost structure. The more test volume Quest can run through its network of labs, the more likely the firm is to generate operating leverage.Reimbursement cuts continue to be the biggest near-term challenge for the lab industry. However, we think Quest and LabCorp, as the largest and lowest-cost producers, have been weathering the PAMA-led Medicare cuts better than smaller competitors. For example, LabCorp expects the Medicare cuts will damp total revenue growth by 160 basis points, while the smaller, hospital-based Sparrow Labs anticipates the same cuts will lop 230 basis points off total revenue this year.
Unlike smaller competitors, Quest and LabCorp are also better positioned to grow volume by contracting with the large private payers. For instance, UnitedHealth decided to contract with Quest, in addition to LabCorp, and then recently rolled out its new preferred lab network, which aims to funnel patients to these lower-cost producers over hospital-based labs. Similarly, both firms are better able to partner with retailers, such as Walmart, Safeway, and Walgreens, to place patient collection sites inside the retail outlets. Though this effort remains in its early stages, management has indicated volume growth has steadily grown at these outlets as patients have become aware of this option. In the end, we expect these more-convenient collection sites should increase compliance and divert more volume away from smaller rivals.
Quest Diagnostics provides diagnostic information services. The company's diagnostic information segment provides information based on the menu of routine, non-routine and clinical testing and anatomic pathology testing, and other diagnostic information services. The company's testing capabilities, includes services for the predisposition, diagnosis, treatment and monitoring of cancers and other diseases, and provides tests in several fields, including endocrinology, immunology, neurology and oncology. The company's diagnostic solutions provides risk assessment services for the life insurance industry, as well as provides healthcare organizations and clinicians health information technology solutions.
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