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Quest Diagnostics (DGX) is scheduled to release its first quarter 2012 results on Wednesday, April 18, 2012, before the market opens. According to the Zacks Consensus Estimate, the company is expected to earn $1.00 per share on revenues of $1,878 million during the quarter. For fiscal 2012, earnings are expected to be $4.54 on revenues of $7,677 million, as per the Zacks Consensus Estimate.

Fourth Quarter Recap

Quest Diagnostics reported earnings of $1.19 per share in the fourth quarter 2011 compared with 97 cents in the year-ago quarter. Reported earnings included charges related to restructuring and integration, CEO succession costs, offset by a favorable tax resolution. Adjusted EPS in the quarter came in at $1.23, handily beating the Zacks Consensus Estimate of $1.06 and the year-ago adjusted EPS of $1.03. For the full year, adjusted EPS came in at $4.53, ahead of both the Zacks Consensus Estimate of $4.29 and the year-ago level of $4.23.

Revenues for the fourth quarter increased 3.0% year over year to $1.9 billion, almost matching the Zacks Consensus Estimate. For fiscal 2011, revenues came in at $7.5 billion, up 1.9% and almost in line with the Zacks Consensus Estimate. The acquisitions of Athena Diagnostics and Celera Corporation contributed 3.2% and 2.2% to revenue growth in the reported quarter and fiscal 2011, respectively.

Clinical testing revenues increased 2.6% during the quarter with clinical testing volume (measured by the number of requisitions) climbed 1.2%. Revenue per requisition increased 2.2%. After witnessing a drop in volume for two consecutive quarters, the improvement was encouraging.

Agreement of Analysts

Out of the 17 analysts covering the stock during the quarter, only one analyst made a down ward estimate revision over the past 7 and 30 days, while no other estimate revision took place. A similar trend can be witnessed for fiscal 2012.

Although volume improvement was witnessed after two consecutive quarters of significant reduction, physician office visits continue to remain under pressure, which is still disappointing. Given the soft industry trends, volume is expected to remain affected even in the first quarter of 2012. While Quest Diagnostics has positive long-term fundamentals in clinical lab industry, the near-term recovery in healthcare utilization trends is still unclear. The analysts expect further visibility on this in the upcoming earning call.

Moreover, revenues from anatomic pathology have been under pressure for the past few quarters due to in-sourcing of the tests by physicians. This continues to be a major issue as the company derived a significant portion of its total revenue from anatomic pathology in fiscal 2011.

In addition, concerns linger about the ongoing margin trends and the company's lower-than-expected fiscal 2012 guidance. Quest Diagnostics expects to report revenue growth of mere 2%-2.5% for fiscal 2012 on EPS expectation of $4.40- $4.55.

However, the analysts remain encouraged with the successful completion of the company's long-awaited CEO succession process that started in October 2011. They expect the management change endeavor could very well turn around the company's fortunes going ahead. However, they are waiting for more light on this matter.

Magnitude of Estimate Revisions

The magnitude of estimate revisions has been insignificant over the past 7 as well as 30 days. Overall, estimates for the first quarter have remained unchanged at the current level of $1.00 over the last seven and 30 days. For fiscal 2012, estimates also remained flat at the current level of $4.54 per share over the past seven as well as 30 days.

Surprise

Barring the second quarter of fiscal 2011, Quest Diagnostics has exceeded estimates in the past four quarters. For the last one year, the company showed a positive surprise of 7.79% compared to the Zacks Consensus Estimate.

Recommendation

We appreciate Quest Diagnostics' current focus on latent areas such as drugs-of-abuse testing, gene-based, esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. The company is witnessing higher demand for these tests compared to routine tests. Besides, the company is adopting several strategies such as suitable acquisitions, increased sales force and targeting additional geographies to drive its top line. With positive volume growth during the quarter coupled with stability in pricing, the company is gearing up for a gradual recovery.

However, the company continues to witness challenges with testing volume. Moreover, the competitive landscape remains tough with the presence of Laboratory Corporation of America Holdings (LH). LabCorp is scheduled to release its first quarter 2012 results on Thursday, April 19, 2012.

Source: Quest Diagnostics: Earnings Preview