DGX Downgraded to Underperform

On Feb 1, we downgraded Quest Diagnostics (DGX - Analyst Report), a leading player in the diagnostic testing market, to Underperform based on the company’s dismal fourth-quarter 2012 results as well as a disappointing outlook for first quarter 2013.

Why the Downgrade?

Quest Diagnostics reported adjusted earnings per share (EPS) from continuing operations of $1.01, down 15.8% year over year, missing the Zacks Consensus Estimate of $1.06. This does not exclude the impact of Hurricane Sandy that reduced the EPS by 6 cents. 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. The first-quarter 2013 guidance was also disappointing and missed our expectation.

Following the release of the fourth-quarter results, the Zacks Consensus Estimates for 2013 and 2014 have gone down significantly. We have lowered our 2013 and 2014 revenue estimates by $153 million and $194 million, respectively. Moreover, we have also lowered our EPS estimates for 2013 and 2014 by 45 and 37 cents to $3.96 and $4.34, respectively.The company now carries a Zacks Rank #5 (Strong Sell).

Cause for Concern

The current market environment remains challenging for QuestDiagnostics due to commercial pricing pressures and Medicare cuts (including recent pathology service reimbursement reduction), which may lead to a 3% reimbursement decline in 2013. Apart from these challenging underlying market conditions, the company is also witnessing several issues in the form of weak volume growth, flat pricing and low organic revenue. Although the last published data showed an increase in physician office visits after a consistent decline since 2008, the sustainability of this improvement is still uncertain.

Med-Tech Stocks That Warrant a Look

While we prefer to avoid Quest Diagnostics until we see signs of improvement in the company's performance, other medical device stocks worth a look are Cyberonics Inc. (CYBX - Analyst Report), Merit Medical Systems, Inc. (MMSI - Snapshot Report) and ResMed Inc. (RMD - Snapshot Report). All are Zacks Rank #1 (Strong Buy) stocks.