Quest Diagnostics (DGX) is scheduled to release its second quarter fiscal 2011 results on Wednesday, July 20, 2011, before the market opens. The company is expected to earn $1.13 during the quarter on $1,913 million in revenues, according to the Zacks Consensus Estimate.
Previous Quarter Highlights
Quest Diagnostics reported an adjusted EPS of $1.00 during the first quarter of fiscal 2011, a penny above the Zacks Consensus Estimate and the year-ago quarter. Revenues for the quarter increased 1% year over year to $1.8 billion, in line with the Zacks Consensus Estimate. A 10.5% decline in the number of outstanding shares had a favorable impact on earnings.
The adjusted earnings in the reported quarter excludes the impact of severe weather ($0.07), costs associated with workforce reduction ($0.05) and transactions ($0.02) related to Athena Diagnostics and Celera Corporation. The year-ago period also witnessed the impact of severe weather ($0.05) and restructuring charges ($0.06).
Clinical testing revenue, which account for most of Quest’s sales, increased 0.3% compared with the prior year. While clinical testing volume (measured by the number of requisitions) during the quarter increased by 2% compared with the year-ago period, revenue per requisition was lower by 1.7%. The impact of a severe weather during the quarter reduced revenue and volume by 1.4%.
Quest updated its outlook for 2011. The company expects to report an adjusted EPS of $4.25–$4.45 ($4.10–$4.30 as per previous guidance) banking on a 2% growth in revenue (1% growth as per previous guidance). This reflects a 1% increase from the Athena acquisition.
The company expects operating margin to be around 17.5%−18% (adjusted) while cash from operations is estimated at $900 million, down from the previous outlook of $1.1 billion, after considering the $241 million charge associated with the MediCal settlement. In addition, the company expects to incur capital expenditure of $220 million.
Agreement of Analysts
Estimate revision trends among the analysts have been insignificant in the last 30 days. Among 20 analysts covering the stock, only 1 analyst has lowered his or her estimate for the second quarter with 1 doing the reverse. For fiscal 2011, 1 analyst has lowered the estimate over the past 30 days.
After several quarters of declining trend, clinical testing volume turned around during the fourth quarter of 2010. As a result, we expect volume growth to remain stable in the second quarter as well. Following the renewal of the majority of contracts during the second quarter of 2010, the company expects stability in revenue per requisition in the second half of 2011. Moreover, physician office visits, albeit down, are showing some improvement and are not expected to change significantly from the current level, thereby lending some stability going forward.
Quest recorded 36% of its revenue from gene-based, esoteric and anatomic pathology testing in 2010. Contribution from this business should rise with the acquisition of Celera and Athena. We expect an update from the company on its future plans regarding these acquisitions. Its biggest competitor, Laboratory Corporation of America Holdings (LH) is also targeting a larger share of this business. Following the acquisition of Genzyme Genetics, LabCorp has set a target of recording 45% of revenue from this specialty business in the next 3-5 years.
Magnitude of Estimate Revisions
The magnitude of revisions has been insignificant over the past 30 days. Overall, estimates for the second quarter increased by a penny to the current level of $1.13 in the last 30 days. For fiscal 2011, estimates have gone down by a penny to the current level of $4.32 per share over the past month.
Quest Diagnostics had exceeded estimates in the past four quarters. The four-quarter average of 3.66% indicates that, on an average, Quest Diagnostics has exceeded the Zacks Consensus Estimate by this magnitude over the last four quarters.
We appreciate Quest Diagnostics’ move to repurchase shares and pay dividends to drive shareholder value. Besides, the company is adopting strategies such as making suitable acquisitions, increasing sales force and targeting additional geographies to drive its top line. We are encouraged by Quest’s strong portfolio of tests, many of which are finding greater acceptance with time. Based on favorable demographic trends and strong focus, Quest will continue to remain one of the leading players in the industry.
We currently have a Neutral recommendation on Quest Diagnostics, which is also supported by the Zacks #3 Rank (Hold).