The announcement of Quest Diagnostics’ ( DGX - Analyst Report ) first quarter of fiscal 2012 results on April 18, 2012 prompted mixed estimate revisions analysts.

First Quarter Highlights

Quest Diagnostics reported EPS of 99 cents in the first quarter of fiscal 2012, improving considerably from the year-ago loss of 33 cents. Reported earnings included charges associated with restructuring and CEO succession costs.

Adjusting for these one-time items, EPS in the reported quarter came in at $1.07, handily beating both the Zacks Consensus Estimate and the year-ago quarter’s adjusted EPS of $1.00. The year-ago quarter included charges related to the Medi-Cal settlement and other special items.

Revenues for the quarter increased 6.3% year over year to $1.93 billion, surpassing the Zacks Consensus Estimate of $1.87 billion. The acquisitions of Athena Diagnostics and Celera Corporation contributed 3.2% to the revenue growth in the reported quarter, resulting in strong organic growth of 3.1%.

Quest Diagnostics increased its EPS guidance by 5 cents on both ends to $4.45– $4.60 for fiscal 2012. However, the revenue growth outlook remained unchanged at 2%–2.5%.

The company reaffirmed the operating margin guidance at 18% and $1.2 billion as cash from operations. The company now expects $200–$250 million of capital expenditure compared with the previous guidance of $225-$250 million.

For a full coverage on the earnings, read: Quest Beats in 1Q, Ups EPS Guidance

Agreement of Analysts

Following the release of first quarter results, estimate revision trends among the analysts were mixed. Over the last 30 days, five of the 18 analysts covering the stock have made upward revisions for the first quarter of fiscal 2012, while six moved in the opposite direction. However, a positive trend can be witnessed for fiscal 2012. Over the past 30 days, fourteen out of 18 analysts have increased their estimates with only one moving in the opposite direction. Changes were insignificant over the past 7 days.

Although physician office visits was on the lower side given the persistent economic uncertainty, the improvement in volume for the past two quarters was encouraging. Quest recorded an increase in clinical testing volume (measured by the number of requisitions) by 3.4%. The Drugs of Abuse testing volume continued to grow about 5% in the reported quarter.

However, analysts are still concerned about the soft industry trend. While Quest Diagnostics possesses positive long-term fundamentals in the 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 13% of its total revenue from anatomic pathology during fiscal 2011.

In addition, concerns linger about the proposed reimbursement cut effective January 1, 2013, which the analysts believe will hinder the company’s growth going forward.

Quest Diagnostics has witnessed efforts on the part of the government to control reimbursement of healthcare services, including clinical testing. Concerns remain about the Congress passing legislation in February 2012 that will reduce payment rates under the Medicare clinical laboratory fee schedule by 2% effective January 1, 2013. Also there is a 1.75% reduction under the ACA, which will also be implemented from January 1, 2013.

However, analysts are encouraged with the successful completion of the CEO succession process and expect the management change to act as a major catalyst for Quest Diagnostics to focus its efforts on reassessing and divesting its non-excelling units. They believe that the management change could very well turn around the company’s fortunes going ahead.

Magnitude of Estimate Revisions

The magnitude of revisions is insignificant following the first quarter results. The consensus estimate for the second quarter remained at $1.17 in the past 30 days. The consensus estimate for fiscal 2012, on the other hand, increased by 5 cents to $7.03 over the last 30 days, which is indicative of market optimism over a longer period on the back of improvement in macroeconomic trends.

Neutral on Quest Diagnostics

We appreciate Quest’s move of repurchasing shares and paying dividends to drive shareholder value. In addition, the company is adopting several strategies to drive its top line, such as suitable acquisitions, increased sales force and targeting additional geographies. 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 ) .

The stock retains a Zacks #3 Rank (Hold) in the short term. Over the long term, we have a Neutral recommendation on Quest Diagnostics, in line with Lab Corp.

About Earnings Estimate Scorecard

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