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Leading diagnostic testing company, Quest Diagnostics (DGX - Analyst Report) reported earnings per share ("EPS") from continuing operations of 87 cents in the fourth quarter of 2012, down considerably from $1.16 in the year-ago period. However, after taking into account certain charges related to restructuring and integration (14 cents), adjusted EPS from continuing operations came in at $1.01, down 15.8% year over year. This does not exclude the impact of Hurricane Sandy that reduced the EPS by 6 cents.

The Zacks Consensus Estimate for the quarter’s EPS was $1.06. The year-ago quarter had incurred a cost of 2 cents per share each, related to restructuring and integration as well as CEO succession costs. For the full year, adjusted EPS from continuing operations was $4.36, down 2 cents from the year-ago adjusted figure and remained below the Zacks Consensus Estimate of $4.49.

Revenues from continuing operations for the fourth quarter were down 4.0% year over year to $1.77 billion, missing the Zacks Consensus Estimate of $1.82 billion. As announced earlier, the impact of Hurricane Sandy reduced the quarter’s revenues by an expected $21 million. Sales for fiscal 2012 remained at $7.4 billion, flat year over year as well as in line with the Zacks Consensus Estimate.

We believe that the overall soft industry trends leading to low volume growth was a dampener for the company. We expect this challenging scenario to adversely affect Quest Diagnostics’ peer Laboratory Corporation of America Holdings (LH - Analyst Report) as well, which is scheduled to release its fourth-quarter and fiscal 2012 results on Feb 8, 2013.

Notably, earlier in Dec 2012, Quest Diagnostics sold its OralDNA Labs salivary-diagnostics business to Access Genetics and recently announced the plan to divest its HemoCue diagnostic products business. Accordingly, revenues from these two businesses are reported as discontinued operations in its fourth-quarter and fiscal 2012 results. The company believes that these divestitures will allow it to refocus its resources toward core diagnostic information services.

Among operating costs, cost of services during the reported quarter stood at $1.07 billion, flat year over year. Selling, general and administrative (SG&A) expenses dropped 4.5% to $421 million. Other operating income was $3.3 million, compared to expense of $0.2 million in the year-ago quarter. Adjusted operating margin in the quarter contracted 232 basis points (bps) to 15.98% on adjusted operating income of $283.5 million.

Quest Diagnostics exited the quarter with $295.6 million in cash and cash equivalents, up from $164.9 million at the end of fiscal 2011. Cash provided by operating activities for the quarter was $380 million compared with $338 million in year-ago quarter. The company is focused on enhancing shareholders’ value and improving returns on capital. During the reported quarter, Quest Diagnostics repurchased shares worth $50 million and reduced outstanding debt by $147 million.

Outlook

Quest Diagnostics provided its fiscal 2013 outlook. The company expects revenue growth to remain in the band of 0%–1%. The current Zacks Consensus Estimate of $7.5 billion (representing annual growth of 1.4%) remains outside the guided range. EPS is expected to remain in the range of $4.35−$4.55. The Zacks Consensus Estimate of $4.49 falls within the range. Moreover, the company expects $250 million of capital expenditure and $1.0 billion as cash provided by operations.

Recommendation

We remain cautious about the company as it is continuously witnessing challenges with testing volume. Concerns also linger about the soft industry trends due to a decline in physician office visits, flat pricing and low organic revenue. Moreover, a disappointing fiscal 2013 guidance reflected the fact that the industry trend will not improve in the near future, which adds to our concerns.

However, we are optimistic regarding the company’s strategy to refocus on Diagnostic Information Services along with the organizational structure developed by the company’s new CEO, Steve Rusckowski. We also expect this to run successfully adding synergies to its ongoing $500 million restructuring initiative, associated with its Invigorate program. The stock retains a Zacks Rank #3 (Hold).

Other Stocks to Consider

While we prefer to remain on the sidelines on Quest Diagnostics, other medical device stocks worth a look are Cyberonics Inc. (CYBX - Analyst Report) and Haemonetics Corporation (HAE - Analyst Report). Both the stocks carry a Zacks Rank #1 (Strong Buy).

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