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Analyst Blog

On May 9, we upgraded Quest Diagnostics (DGX - Analyst Report), a leading player in the diagnostic testing market, to Neutral. In spite of disappointing first-quarter 2013 results, we are optimistic about the company’s recently adopted restructuring initiative as well as its focus on high potential areas such as core diagnostic information services.

Why the Upgrade?

Quest Diagnostics reported dismal results for the first quarter of 2013, missing the Zacks Consensus Estimate on both lines. Adjusted earnings per share (EPS) were 89 cents, down 15.3% year over year.Sales declined 6.4%, with a 6.7% drop in diagnostic information services revenues. The current market environment remained challenging in the form of commercial pricing pressures and Medicare cuts. We are also concerned with the overall soft industry trends leading to volume pressure. This was reflected in the conservative 2013 outlook.

However, the weak performance in the quarter has not deterred Quest Diagnostics’ focus on areas with high potential such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. As a part of this strategy, earlier in Apr 13, Quest completed the divesture of HemoCue diagnostics products business. Moreover, last December, the company shed its OralDNA Labs salivary-diagnostics business in order to refocus its resources toward core diagnostic information services. We also hold a favorable view regarding Quest Diagnostics’ recently implemented major organizational restructuring in order to increase operational efficiency and restore growth. We assume all these endeavors could very well turn around the company’s fortunes going ahead. The company now carries a Zacks Rank #3 (Hold).

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 Conceptus, Inc. , VCA Antech Inc. (WOOF - Snapshot Report) and HEALTHSOUTH Corp. (HLS - Snapshot Report). All are Zacks Rank #1 (Strong Buy) stocks.

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