Bear of the Day: Quest Diagnostics (DGX)

Quest Diagnostics, a leading provider of medical diagnostic testing services, reported a lackluster fourth quarter 2012 on January 23 with adjusted EPS of $1.01, down 15.8% year over year, missing the Zacks Consensus Estimate by $0.05

Disappointing Q4

Fourth quarter results for Quest Diagnostics (DGX - Analyst Report) were of particular concern when seen from the top line. Year over year sales declined 4% primarily due to 4.4% drop in diagnostic information services revenues that accounts for over 90% of total revenues of the company.

Adjusted operating margin in the quarter contracted 232 basis points (bps) to 15.98%. Additionally, analysts are concerned about the company guidance for 2013 given market and competitive challenges. Quest Diagnostic's expected revenue growth for the upcoming fiscal quarter is to remain within a band as low as 0% to 1%, missing the Zacks Consensus Estimate of $7.5 billion that represents annualized growth rate of 1.4%.

Current Headwinds

The current market environment continued to remain challenging for Quest Diagnostics in the form of commercial pricing pressures, Medicare cuts (including recent pathology service reimbursement reduction), which may lead to a 3% reimbursement decline in 2013.

Apart from this challenging underlying market conditions, the company is also witnessing several issues in the form of weak volume growth, flat pricing and low organic revenue. Although the last published data showed inching up of physician office visits after a consistent decline since 2008, the sustainability of this improvement is still uncertain.

After analyzing the reasons behind the fourth quarter debacle and the conservative outlook, Zacks analysts downgraded the stock to Underperform on February 1 and lowered their estimates for 2013 and 2014. They also lowered their 2013 and 2014 revenue estimates by $153 million and $194 million, respectively. Correspondingly, EPS estimates were lowered for 2013 and 2014 by 45 and 37 cents to $3.96 and $4.34, respectively.

These actions are consistent with the trend among other covering analysts as you can see from the Price & Consensus chart below which shows consensus EPS estimates and their changes in magnitude and direction over time.

Finally, from a technical view of the chart, the stock is stuck underneath its 50 and 200-day moving averages. A break of $56 will probably bring a test of the 52-week low near $53.

And even though we are talking about a company with a forward P/E of just 13X, until the revenue and earnings picture is clearer for Quest, it's probably best to wait for another quarter before considering this name on the long side.

Kevin Cook is a Senior Stock Strategist with Zacks.com