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Quest Diagnostics (DGX - Analyst Report) is scheduled to release its second quarter 2012 results on Thursday, July 19, 2012, before the market opens. According to the Zacks Consensus Estimate, the company is expected to earn $1.18 per share on revenues of $1,939 million during the quarter. For fiscal 2012, earnings are expected to be $4.60 on revenues of $7,708 million, as per the Zacks Consensus Estimate.

First Quarter Recap

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 adjusted EPS of $1.00. The year-ago quarter included charges related to the Medi-Cal settlement and other special items.

Revenues during 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 in cash from operations. The company now expects $200–$250 million of capital expenditure compared with the previous guidance of $225-$250 million.

Agreement of Analysts

Ahead of the earnings release, we notice a somewhat bullish trend in the estimate revisions. Out of the 17 analysts covering the stock during the quarter, only one analyst made an upward revision over the past 7 and 30 days, while no downward revision took place. A similar trend can be witnessed for fiscal 2012 where, of the 17 analysts, one and two analysts increased the estimate over the last 7 and 30 days, respectively, while none moved in the opposite direction.

Although, concerns linger about the soft industry trends due to a decline in physician office visits, the ongoing margin trends and the company’s lower-than-expected fiscal 2012 guidance, the analysts still hold a favorable view regarding the management change. They strongly anticipate that the change in leadership along with the ongoing $500 million restructuring initiative by the company will improve margins in the upcoming quarters.

Moreover, on June 27, 2012 at its Analyst meet, Quest Diagnostics introduced its new CEO, Steve Rusckowski and provided insight into Mr. Rusckowski’s leadership style along with some of his key areas of development including operation and execution. The analysts in this regard are of the opinion that Mr. Rusckowski should utilize his experience in operational excellence over a long time. They are encouraged with his merger and acquisition decisions and expect this to remain a key area of growth for Quest Diagnostics going forward. They also expect capital to continue to be deployed into faster-growth esoteric markets.

Mr. Rusckowski, however, is expected to demonstrate a more comprehensive strategic plan in August 2012. The analysts assume this endeavor could very well turn around the company’s fortunes going ahead. However, they are waiting for more light on this matter.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate of $1.18 for the second quarter headed north by a penny over the last 7 days. For full-year 2012, the estimate of $4.60 was up by the same magnitude over the last 30 days.

Surprise

Barring the second quarter of fiscal 2011, Quest Diagnostics has exceeded estimates in the past four quarters. For the last one year, the company showed a positive surprise of 9.78% compared to the Zacks Consensus Estimate.

Neutral on Quest Diagnostics

We appreciate Quest Diagnostics’ current focus on latent areas such as drugs-of-abuse testing, gene-based, esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. The company is witnessing higher demand for these tests compared to routine tests. Besides, the company is adopting several strategies such as accretive acquisitions, increased sales force and targeting additional geographies to drive its top line.

With positive volume growth during the last reported quarter coupled with stability in pricing, the company is gearing up for a gradual recovery. We also appreciate Quest Diagnostics’ move of repurchasing shares and paying dividends to drive shareholder value.

We also await the result of the changes Mr. Rusckowski plans to implement and prefer to remain mute till further clarity is available.
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 second quarter 2012 results along with Quest Diagnostics on the same day.

We currently have a Neutral recommendation on Quest Diagnostics. The company retains Zacks #3 Rank (short-term Hold rating).

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