), a leading player in the diagnostic testing market, is scheduled
to release its third quarter 2012 results on Wednesday, October 17,
2012, before the market opens. According to the Zacks Consensus
Estimate, the company is expected to earn $1.18 per share on
revenues of $1,909 million during the quarter. For fiscal 2012,
earnings are expected to be $4.57 on revenues of $7,638 million, as
per the Zacks Consensus Estimate.
Second Quarter Recap
Quest Diagnostics reported earnings per share (EPS) of $1.11 in
the second quarter of fiscal 2012, up considerably from $1.02 in
the year-ago period. The quarter's earnings included charges
associated with restructuring, integration, and CEO succession
Adjusting for these one-time items, EPS from continuing
operations came in at $1.17, lagging the Zacks Consensus Estimate
by a penny but up 4.5% year over year. The year-ago quarter
included charges related to transaction and integration associated
with the Athena Diagnostics and Celera transactions.
Revenues for the second quarter remained flat year over year at
$1.90 billion but marginally missed the Zacks Consensus Estimate of
$1.93 billion. Clinical testing revenues and volume (measured by
the number of requisitions) both inched up 0.7% during the quarter
while revenue per requisition remained flat year over year. We
believe that the overall soft industry trends which led to a lower
volume growth were the dampener for the company.
Quest Diagnostics reiterated its EPS guidance of $4.45-$4.60 for
fiscal 2012. However, revenue growth outlook was reduced to the
band of 1%-2% (earlier outlook being 2%-2.5%). The company also
reaffirmed the operating margin guidance at 18% and $1.2 billion as
cash from operations. Further, it expected $200 million of capital
expenditure compared with previous guidance of $200-$225
Agreement of Analysts
Ahead of the earnings release, we notice a somewhat bullish
trend in the estimate revisions. Out of the 16 analysts covering
the stock during the quarter, two analysts made upward revisions
over the past 7 and 30 days, while no downward revision took place.
An exactly similar trend has been witnessed for fiscal 2012.
Although, concerns linger about the soft industry trends due to
a decline in physician office visits, the ongoing margin trends and
the company's lower-than-expected fiscal 2012 guidance, the
analysts hold a favorable view regarding the company's recently
announced (on October 11, 2012) major organizational restructuring
in order to increase operational efficiency and restore growth.
With effect from January 1, 2013, this structural change will
replace the company's existing business structures with two new
business groups, Diagnostic Information Services and Diagnostic
Solutions. According to the company, these structural changes will
eliminate 3 management layers representing 400-600 management
positions by the end of 2013 thereby making an annualized savings
of $65 million.
The analysts anticipate that this organizational structure
developed by the company's new CEO, Steve Rusckowski will run
successfully adding further synergies to the company's ongoing $500
million restructuring initiative associated with its Invigorate
program. They strongly expect these to improve margins in the
The analysts are impressed with Mr. Rusckowski's leadership
style along with his key areas of development including operation
and execution. The analysts in this regard are of the opinion that
Mr. Rusckowski should utilize his experience in operational
excellence over a long time.
They are also encouraged with his merger and acquisition
decisions and expect this to remain a key area of growth for Quest
Diagnostics going forward. They expect capital deployment to
continue into the faster-growth esoteric markets. The analysts
assume all these endeavors 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 Zacks Consensus Estimate of $1.18 for the third quarter
headed south by 2 cents over the last 7 days. For full-year 2012,
the estimate of $4.57 was down by 3 cents over the same period.
Barring the second quarter of fiscal 2012, Quest Diagnostics has
exceeded estimates in the past four quarters. For the last one
year, the company achieved a positive surprise of 7.13% compared to
the Zacks Consensus Estimate.
Neutral on Quest Diagnostics
Quest Diagnostics' recent move for a major structural change is
encouraging. We expect the structural changes along with the
company's ongoing $500 million cost reduction plan to enhance its
growth opportunities in the longer term. So, it may be a good bet
for investors seeking growth over longer term.
However, the current price is not a good entry point for
short-term investors as the ongoing issues like weak volume growth,
flat pricing, low organic revenue and challenging underlying market
conditions may make it to lose some market capitalization in the
Also, we think an income-seeking investor with the perspective
of high risk-return tradeoff should not be disappointed with an
investment in Quest Diagnostic as the company steadily deploys
capital through dividends and share buybacks. In the last reported
quarter, the company repurchased 882,000 shares for $50 million and
paid a quarterly dividend of 17 cents that yields 1.1%
Besides, the company is adopting several strategies such as
accretive acquisitions, increasing sales force and targeting
additional geographies to drive its top line. We are also
encouraged with the company's current focus on latent areas such as
drugs-of-abuse testing, gene-based, esoteric testing for cancer,
cardiovascular disease, infectious disease and neurological
The company is witnessing higher demand for these tests compared
to routine tests. Notably, earlier this month, the company received
the U.S. Food and Drug Administration's ("FDA") 510(k) clearance
for its Simplexa Flu A/B & RSV Direct test, which was developed
by the company's Focus Diagnostics Laboratory and a global
. Subsequently, Quest Diagnostic launched this test in the U.S.
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
). LabCorp is scheduled to release its third quarter 2012 results
on October 18, 2012.
We currently have a Neutral recommendation on Quest Diagnostics.
The company retains a Zacks #2 Rank (short-term Buy rating).
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