On May 22, we issued an updated research report on Quest Diagnostics, Inc. (DGX - Free Report), a major commercial laboratory services provider. The stock currently carries a Zacks Rank #3 (Hold).

Quest Diagnostics has significantly outperformed the Zacks categorized Medical - Outpatient and Home Healthcare industry with respect to share price movement over the past three months. It continues to maintain this bullish trend with solid first-quarter results and a strong 2017 outlook. Per the last share price movement, Quest Diagnostics has gained 10.76% over the same time frame as against 2.73% decline of the broader industry.

The upside was further backed by successful execution of the company’s strategy to grow its esoteric testing and drive profitable growth. Major drivers behind the quarter’s solid earnings performance included two natal genetic carrier screening, prescription drug monitoring, hepatitis C and QuantiFERON TB testing.

In addition, new relationships with hospitals and integrated delivery networks were the other growth drivers. Particularly, the company is positive about its agreement with PeaceHealth in the Pacific Northwest, which is expected to bolster growth, later in 2017.

Late in 2016, Quest Diagnostics came up with renewed and upgraded long-term growth outlook (beyond 2017) based on its new and extended two-point strategy to generate shareholder value, accelerate growth and drive operational excellence.

The company currently expects revenue growth for the period 2017–2020 to be 3–5%. Earnings for the same period are expected to grow faster than revenues in the mid-to-high single digit range. According to the company, its increasing number of partnerships with other health care leaders are creating promising opportunities for top and bottom-line growth while improving the patient experience and reducing the overall cost of care.

After experiencing several quarters of low volume environment, the company has finally started to witness improvement in terms of both volume and pricing. However, sustainability of this improvement is still questionable. Further, reimbursement woes remain.

Also, Quest Diagnostics is highly disappointed with the recent CMS proposal related to the Protecting Access to Medicare Act. Currently, it is anticipated that the new fee schedule will get implemented in 2018. If this process does not recognize the value that clinical testing services bring to the healthcare system, Quest Diagnostics’ business can be materially adversely impacted.

Also, the indecision related to Affordable Care Act (ACA) has also created significant uncertainty in the healthcare market of late. President Trump announced that he favors repealing the ACA in 2017. The leaders of the Republication-controlled federal legislature also expressed a desire to repeal it. Uncertainty regarding the ACA prior to any such repeal, amendment, replacement or reform could create uncertainty in the healthcare market.

Key Picks

Some better-ranked medical stocks include Align Technology, Inc. (ALGN - Free Report) , Hologic, Inc. (HOLX - Free Report) and Baxter International Inc. (BAX - Free Report). Align Technology sports a Zacks Rank 1 (Strong Buy), while Baxter International and Hologic both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology gained 77.8% in the past one year, better than the S&P 500s gain of 14.8%. It delivered a four-quarter average earnings surprise of 19.89%.

Hologic gained 29.2% in the last one year compared with the S&P 500 mark. The company pulled a stellar four-quarter average earnings surprise of over 5.79%.

Baxter International rose around 33.0% in the last one year compared with the S&P 500. It came up with a four-quarter average earnings surprise of 17.14%.