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Quest Diagnostics (NYSE:DGX) is scheduled to release its third quarter fiscal 2011 results on Tuesday, October 25, 2011 before the market opens. The company is expected to earn $1.11 during the quarter on $1,902 million in revenues, according to the Zacks Consensus Estimate.

Second Quarter Highlights

Quest Diagnostics reported adjusted EPS of $1.12 during the second quarter of fiscal 2011, a penny below the Zacks Consensus Estimate but higher than last year's $1.07. Adjusted EPS takes into account 10 cents per share of transaction and integration costs associated with the Athena Diagnostics and Celera transactions. An 11.8% decline in the number of outstanding shares had a favorable impact on earnings.

Revenues for the quarter increased 1.5% year over year to $1.9 billion, in line with the Zacks Consensus Estimate. The two acquisitions contributed 2.5% to revenue growth. While clinical testing volume (measured by the number of requisitions) during the quarter decreased 0.9% compared with the year-ago period, revenue per requisition increased 1.6%.

Quest Diagnostics also announced a cost reduction plan to prepare for upcoming growth opportunities. The company aims to reduce its cost structure by $500 million over the next 3 years, targeting a 20% operating margin goal.

Quest Diagnostics updated its outlook for 2011. The company lowered the high end of its adjusted EPS expectation by 10 cents to $4.25–$4.35, banking on a 1.5% revenue growth (previous guidance of 2%). Moreover, adjusted operating margin should be around 17.5% (previous guidance of 17.5%−18%) with $900 million in cash from operations (after considering the MediCal settlement). In addition, the company lowered its capital expenditure guidance by $20 million to $200 million.

Agreement of Analysts

Estimate revision trends among the analysts have been negative in the last 7 and 30 days. Among the 19 analysts covering the stock, seven lowered their estimates for the third quarter over the past month with none revising upward. During the past week, estimates have been reduced by three analysts. A similar pattern has been witnessed for fiscal 2011 estimates.

The drop in volume during the last reported quarter came as a disappointment after recording positive growth in the preceding two quarters. Quest has witnessed softness in physician office visits that led to reduced volume. Given the current economic uncertainty, volume is expected to remain under pressure.

Moreover, revenues derived from anatomic pathology have been under pressure for the past few quarters driven by in-sourcing of the tests by physicians. This continues to be a major issue as the company derived 14% of total revenues from anatomic pathology during fiscal 2010. We also await an update regarding the company’s restructuring program.

Magnitude of Estimate Revisions

Despite the bearish sentiment, the magnitude of revisions has been insignificant over the past 30 days. Overall, estimates for the third quarter decreased by a penny to the current level of $1.11 in the last 7 days. For fiscal 2011, estimates have gone down by a penny to the current level of $4.22 per share over the past week.

Surprise

Barring the second quarter of fiscal 2011, Quest Diagnostics has exceeded estimates in the past four quarters. The four-quarter average of 4.57% indicates that, on an average, Quest Diagnostics has exceeded the Zacks Consensus Estimate by this measure over the last four quarters.

Recommendation

We appreciate Quest Diagnostics’ move to repurchase shares and pay dividends to drive shareholder value. We are encouraged by Quest’s strong portfolio of tests, many of which are finding greater acceptance with time. However, the company continues to witness challenges with testing volume. Moreover, the competitive landscape is tough with the presence of Laboratory Corporation of America Holdings (NYSE:LH).

We currently have a Neutral recommendation on Quest Diagnostics, in line with Lab Corp. Both the stocks retain short-term Zacks #3 ranks (Hold).

Read the full analyst report on DGX

Read the full analyst report on LH

Source: Quest Diagnostics Earnings Preview