Sign in

    Quest Diagnostics Inc (DGX)

    Q3 2024 Earnings Summary

    Reported on Feb 18, 2025 (Before Market Open)
    Pre-Earnings Price$147.37Last close (Oct 21, 2024)
    Post-Earnings Price$151.33Open (Oct 22, 2024)
    Price Change
    $3.96(+2.69%)

    What went well

    • Quest Diagnostics is expected to achieve higher revenue growth in 2025 due to recent acquisitions, including LifeLabs, which will exceed their 1%-2% revenue growth target from acquisitions next year. Excluding LifeLabs, they expect to be towards the high end of this range due to the carryover contribution from other acquisitions.
    • The company reported strong organic revenue growth of 4.2% in Q3 2024, driven by volume growth and improvements in revenue per requisition, and they estimate approximately 3% organic growth for 2025, indicating a solid underlying business performance.
    • EPS growth is expected to be in the high single digits in 2025, consistent with their long-term outlook, with potential upside due to the early closure of the LifeLabs acquisition, which could contribute more significantly to earnings, and the expected reduction in Haystack dilution next year.

    What went wrong

    • Continued Wage Inflation Pressures: Quest Diagnostics anticipates wage inflation to remain at 3% to 4% in 2025, with no significant moderation expected. This sustained cost pressure could impact operating margins if not fully offset by efficiency initiatives like Invigorate.
    • Challenging Pricing Dynamics in Health Systems: The company is experiencing net negative pricing dynamics in the health systems space due to competitive pressures and unfavorable reimbursement rates. This could negatively affect revenue growth and margins within this segment.
    • Dilutive Impact of LifeLabs Acquisition on Operating Margins: While the LifeLabs acquisition will contribute to revenue growth, Quest Diagnostics expects it to be dilutive to operating margin rates in the near term. Operating margins from LifeLabs are projected to take 2 to 3 years to reach the company's average, potentially weighing on overall profitability until then.

    Q&A Summary

    1. Organic Growth Outlook
      Q: How will organic growth look next year?
      A: Management expects organic growth of approximately 3% in 2025, driven by strong utilization and share gains, including the impact from being in-network with Elevance starting January 2025. They note that utilization remains strong, and the assumption of 3% growth is solid.

    2. LifeLabs Acquisition Impact
      Q: What is the margin and earnings impact of the LifeLabs acquisition?
      A: The LifeLabs deal closed earlier than expected, contributing about $70 million in revenue over five weeks in Q3. While initially dilutive to operating margins, it is expected to be accretive to earnings by $0.10 to $0.15 in the first full year. Management anticipates margins to improve over the next 2-3 years, eventually reaching Quest's enterprise level.

    3. Contracts with Elevance and Sentara Health
      Q: What can you tell us about the new contracts with Elevance and Sentara Health?
      A: Quest will be in-network with Elevance in Colorado and Nevada starting January 2025, with expanded access in Georgia and Virginia , which should help fuel organic growth next year. Previously, Quest was not in Elevance's network in those states. Sentara Health also added Quest to their network, which was previously served by other labs.

    4. Wage Inflation and Turnover Rates
      Q: How is wage inflation impacting you, and are turnover rates improving?
      A: Turnover rates have improved to 18-19% from the low 20s last year. Wage inflation remains at 3-4%, slightly less than last year but higher than historical norms. Management expects wage inflation to stay around 3% next year, and is offsetting it through automation and AI in laboratories.

    5. 2025 EPS Growth Expectations
      Q: Should EPS grow faster next year given all the positive factors?
      A: Despite revenue growth from M&A and improved organic growth, management expects EPS to grow in the high single digits in 2025. They cite ongoing cost headwinds, including inflation at 3-4%, and competitive dynamics in the health system space.

    6. PAMA Legislative Update
      Q: Any updates on the permanent solution for PAMA?
      A: PAMA cuts have been delayed for five consecutive years, which is welcomed. Management plans to push for a fix that acknowledges inflation since 2019, advocating for Medicare rates to increase rather than continuous delays.

    7. Haystack Asset Performance
      Q: What is the outlook for the Haystack asset?
      A: The dilution from Haystack is approximately $0.20 this year, expected to be less next year. Quest is preparing to launch the assay in the next few months and expects to obtain reimbursement as they move forward.

    8. Revenue Details and COVID Impact
      Q: Can you provide details on revenue growth and COVID impact?
      A: Total revenue grew by 8.5% in Q3, with organic growth at 4.2%. M&A contributed about 4%, including $70 million from LifeLabs. COVID impacted revenue growth by about 50 basis points year-over-year.

    9. Unit Pricing Outlook for 2025
      Q: What is the expected unit pricing trend for 2025?
      A: Management expects unit pricing to be flat to slightly positive in 2025. While health systems present a net negative in pricing dynamics, health plans are modestly positive, and government business remains flat due to PAMA cuts being deferred.

    10. Hospital Outreach Deals and Market Share Gains
      Q: How are hospital outreach deals contributing to market share gains?
      A: Quest has acquired outreach businesses from Allina Health, OhioHealth, and University Hospitals, entering markets where they previously had minimal share. These deals place Quest in strong positions in big, growing markets, and they continue to look for similar opportunities.

    Related Publications