DGX Disappoints in 3Q, Guides Low - Analyst Blog

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Leading diagnostic testing company Quest Diagnostics ( DGX ) reported earnings per share (EPS) of $1.01 in the third quarter of 2012, down considerably from $1.08 in the year-ago period. However, after taking into account certain charges related to restructuring and integration (17 cents), adjusted EPS from continuing operations came in at $1.18, flat year over year and remained in line with the Zacks Consensus Estimate. The year-ago quarter recorded a cost of 10 cents per share related to restructuring and integration.

Revenues for the quarter were down 2.9% year over year to $1.85 billion nominally missing the Zacks Consensus Estimate of $1.88 billion. Clinical testing revenues during the quarter decreased 2.1% and volume (measured by the number of requisitions) inched down 1.1%. Revenue per requisition was down 1% year over year.

We believe that the overall soft industry trends leading to low volume growth was a dampener for the company. We expect this challenging scenario to adversely affect Quest Diagnostics' peer Laboratory Corporation of America Holdings ( LH ) as well, which is scheduled to release its third quarter 2012 results on October 18, 2012.

Among the operating costs, cost of services during the reported quarter stood at $1.09 billion, down 2.4% year over year. Selling, general and administrative (SG&A) expenses dropped 3.1% to $432.6 million. Adjusted operating margin in the quarter contracted 20 basis points (bps) to 17.8% on adjusted operating income of $329.1 million.

Quest Diagnostics exited the quarter with $191.8 million in cash and cash equivalents, up from $164.9 million at the end of fiscal 2011. Cash provided by operating activities for the quarter was $395 million compared with $338 million in year-ago quarter. The company is focused on enhancing shareholders' value and improving returns on capital. During the reported quarter, Quest repurchased shares worth $50 million and reduced outstanding debt by $292 million.

Lowers Outlook

A disappointing third quarter performance forced Quest Diagnostic to lower its fiscal 2012 guidance. The revenue growth outlook was reduced to 0.5% (earlier outlook being 1%-2%). The company also lowered the higher end of its EPS guidance to the band of $4.45- $4.55 ($4.45- $4.60).

However, the company reaffirmed the operating margin guidance at 18% and $1.2 billion as cash from operations. The company now expects $180 million of capital expenditure compared with previous guidance of $200 million.

Recommendation

We remain cautious about the company as it is continuously witnessing challenges with testing volume. Concerns also linger about the soft industry trends due to a decline in physician office visits, flat pricing, low organic revenue. Moreover, a decline in the company's fiscal 2012 guidance reflected the fact that the industry trend will not improve in near future, which adds to our concern.

Although, we hold a favorable view regarding the company's recently announced (on October 11, 2012) massive organizational restructuring in order to increase operational efficiency and restore growth, the near-term visibility remains a matter of concern. We currently have a Neutral recommendation on Quest Diagnostics.


 
QUEST DIAGNOSTC (DGX): Free Stock Analysis Report
 
LABORATORY CP (LH): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: DGX , EPS , LH

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