Quest Outperforms, Ups Outlook

Quest Diagnostics’ (DGX - Analyst Report) third quarter earnings per share of $1.02 beat the Zacks Consensus Estimate of 96 cents and 86 cents reported in the year ago period. Revenues for the quarter increased 3.9% to $1.9 billion. Clinical testing revenues, which account for most of Quest’s sales increased 4.3% compared to the prior year. 

Quest Diagnostics witnessed strong testing demand in the areas of cancer, allergies, and vitamin D levels. Among the latest initiatives, the company introduced the first commercial test for the H1N1 flu virus authorized by the US Food and Drug Administration (FDA) for emergency use, and launched a saliva-based genetic test that helps physicians predict response to the blood thinner Plavix. 

While underlying volume in clinical testing (measured by the number of requisitions), continued to grow in the quarter, reported testing volume was unchanged from the prior year, including a 23% decline in drugs-of-abuse testing volume. The decline in drug abuse testing volume reduced Quest’s consolidated volume by 1.7%. 

Operating margin for the third quarter rose to 18.4% with operating income of $348 million compared to 17.4% in the year ago period with operating income of $317 million. Operating margin in the third quarter of 2008 was affected due to the impact of hurricanes.
 
Quest’s balance sheet improved further this quarter. Cash flow from operations increased to $374 million compared to $329 million for 2008. During the quarter, the company repurchased $100 million of its common shares and made capital expenditures of $41 million. 

In addition to posting a strong quarter, Quest Diagnostics has raised the guidance for 2009. The company now expects its earnings from continuing operations in the range of $3.80 – $3.85, up from the earlier guidance of $3.70 – $3.80. Revenue is expected to grow at about 3% with operating margin exceeding 18%.

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