Earning Scorecard: Quest Diagnostics

The announcement of Quest Diagnostics’ (DGX - Analyst Report) fourth quarter and fiscal 2011 results on January 24, 2012, has triggered downward estimate revisions by the analysts following the stock.

Fourth Quarter Highlights

Quest reported EPS of $1.19 in the fourth quarter of fiscal 2011 compared with 97 cents in the year-ago period. Reported earnings included charges associated with restructuring and integration, CEO succession costs, offset by a favorable tax resolution.

Adjusting for these one-time items, EPS in the reported quarter came in at $1.23, handily beating the Zacks Consensus Estimate of $1.06 and the adjusted EPS of $1.03 in the year-ago quarter. A 7.4% decline in the number of outstanding shares to 157 million also impacted the quarterly earnings favorably. For the full year, adjusted EPS came in at $4.53, ahead of both the Zacks Consensus Estimate of $4.29 and the year-ago level of $4.23.

Revenues for the quarter increased 3.0% year over year to $1.9 billion, almost matching the Zacks Consensus Estimate. For fiscal 2011, revenues came in at $7.5 billion, up 1.9% and almost in line with the Zacks Consensus Estimate. The acquisitions of Athena Diagnostics and Celera Corporation contributed 3.2% and 2.2% to revenue growth in the reported quarter and fiscal 2011, respectively.

Clinical testing revenues increased 2.6% during the quarter with clinical testing volume (measured by the number of requisitions) climbed 1.2%. Revenue per requisition increased 2.2%. After witnessing drop in volume for two consecutive quarters, the improvement was encouraging.

For a full coverage on the earnings, read: Quest's EPS Beats, Revs In Line

Agreement of Analysts

Following the release of fourth quarter results, estimate revision trends among the analysts depict a negative bias for the company’s earnings for the forthcoming periods. Over the last 30 days, 5 of the 18 analysts covering the stock have made downward revisions for the first quarter of fiscal 2012, while one moved in the opposite direction. A similar trend can be witnessed for fiscal 2012. Over the past 30 days, out of the 19 analysts, 18 have lowered their estimates with one moving in the opposite direction. Changes were insignificant over the past 7 days.

Although volume improvement took place after last two quarters of prominent reduction, physician office visits continue to remain under pressure, which is still disappointing. Given the soft industry trends volume is expected to remain under pressure. While Quest has positive long-term fundamentals in clinical lab industry, the near-term recovery in healthcare utilization trends is still unclear.

Moreover, revenues derived from anatomic pathology have been under pressure for the past few quarters due to in-sourcing of the tests by physicians. This continues to be a major issue as the company derived 14% of its total revenue from anatomic pathology during fiscal 2010.

In addition, concerns linger about the ongoing margin trends and the company’s lower-than-expected fiscal 2012 guidance. Quest Diagnostics expects to report revenue growth of 2%–2.5% in fiscal 2012. Before the company’s fourth quarter earning release, the Zacks Consensus Estimate for revenue growth was 2%, at the lower end of the company’ guidance range. However, EPS expectation of $4.40– $4.55 was way below the Zacks Consensus Estimate of $4.68.

However, the news of the formation of a search committee for the replacement of the company’s President, Chairman and CEO Surya N. Mohapatra, came as a positive step amidst several recent headwinds. The management change endeavor could very well turn around the company’s fortunes going ahead.

Magnitude of Estimate Revisions

The magnitude of revisions is modest following the fourth quarter results. Overall, estimates for the next two quarters have gone down by 2 cents and 4 cents to $1.01 and $1.18, respectively. However, estimates for 2012 have gone down by 12 cents to $4.56.

Our Recommendation

We appreciate Quest’s move of repurchasing shares and paying dividends to drive shareholder value. Besides, the company is adopting several strategies such as suitable acquisitions, increased sales force and targeting additional geographies to drive its top line. With positive volume growth during the quarter coupled with stability in pricing, the company is gearing up for a gradual recovery. We are encouraged by Quest’s strong portfolio of tests, many of which are finding greater acceptance with time.

However, the company continues to witness challenges with testing volume. Moreover, the competitive landscape remains tough with the presence of Laboratory Corporation of America Holdings (LH - Analyst Report). LabCorp is scheduled to release its fourth quarter 2011 results on Friday, February 10.

We currently have a Neutral recommendation on Quest Diagnostics, in line with Lab Corp.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard" articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/

Read the full analyst report on DGX

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