Barely a month-and-a-half after upgrading Quest Diagnostics Inc DGX 0.51% to Equal-weight, Morgan Stanley turned incrementally positive on the shares.
The Analyst
Analyst Ricky Goldwasser upgraded shares of Quest Diagnostics from Equal-weight to Overweight and increased the price target from $103 to $120.
The Thesis
The long-term strategic partnership announced by UnitedHealth Group Inc UNH 1.13% with Quest Diagnostics and Laboratory Corp. of America Holdings LH 1.11% — and Aetna Inc AET 0.99%‘s deal with LabCorp — have served to remove contract overhang, signaling a “more disciplined pricing environment” going forward, Goldwasser said in a Tuesday note. (See the analyst’s track record here.)
The removal of contract overhang increases Morgan Stanley’s confidence in Quest’s ability to deliver earnings growth at the high end of its 3-5 percent long-term goal.
The company remains poised to expand its market share from 1.5-3.5 percent to 15 percent as it becomes an in-network provider for UnitedHealth’s members beginning Jan. 1, 2019, Goldwasser said.
“We expect Quest will capitalize the opportunity over a two-to-three-year period, translating to [an] incremental 470bp of volume per year through 2021.”
Citing volume increase from the UnitedHealth contract that was partly offset by lower pricing and lost Aetna volume, Morgan Stanley increased its 2019 revenue and earnings per share estimates for Quest from $7.903 billion and $6.88 to $8.055 billion and $7.02, respectively.
The firm also raised its 2020 estimates, with EPS forecast to come in 6.5 percent higher than Quest’s guidance.
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