) first-quarter 2014 adjusted earnings per share (EPS) from
continuing operations of 84 cents missed both the Zacks Consensus
Estimate and the year-ago number by 5.6%.
Adjusted EPS in the reported quarter excludes restructuring
and integration charge costs associated with recent acquisitions
and the company's ongoing efforts to drive operational
excellence. Reported EPS in the first quarter was 71 cents, also
a penny short of the year-ago reported earnings.
Revenues from continuing operations for the first quarter of
2014 were down 2.3% year over year to $1.75 billion, in line with
the Zacks Consensus Estimate. Volume (measured by the number of
requisitions) edged up 0.7% year over year as recent acquisitions
by the company added 3.5% to the volume.
Revenues per requisition dropped 2.8%, primarily due to
reduced reimbursement and the business mix impact of Quest
Diagnostics' year-ago toxicology acquisition.
We believe that the overall soft industry trends leading to
low volume growth were a dampener for the company. In addition,
lower healthcare utilization and reimbursement cuts acted as
other major deterrents. We expect this challenging scenario to
adversely affect Quest Diagnostics' peer
Laboratory Corporation of America Holdings
) as well, which is scheduled to release its first-quarter 2014
results on Apr 25.
Among operating costs, cost of services during the reported
quarter stood at $1.1 billion, up 0.82% year over year. Selling,
general and administrative (SG&A) expenses fell 7.4% to $415
The company did not incur any operating expenses in the
'Other' category as against $1 million incurred in the year-ago
quarter. Accordingly, adjusted operating margin in the quarter
contracted 59 basis points (bps) to 13.2% on adjusted operating
income of $230 million.
Quest Diagnostics exited the quarter with $144 million in cash
and cash equivalents, down from $187 million at the end of 2013.
Cash provided by operating activities for the year was $84
million compared with $47 million a year ago.
Quest Diagnostics increased its 2014 guidance. The company
currently expectsrevenues to increase in the range of 2% to 4%.
Earlier the company had estimated 2014 revenues to remain 2%
below the 2013 level. The current Zacks Consensus Estimate is
pegged at $7.30.
In addition, the company's 2014 adjusted EPS is expected to
remain in the range of$3.95 to $4.15 as against the earlier
provided range of $3.90−$4.10. The Zacks Consensus Estimate of
$4.04 remains within the range.
Cash provided by operations outlook remains at $900 million,
and the estimate for capital expenditure is reiterated at $300
Quest Diagnostics has been focusing on high-potential areas
such as gene-based esoteric testing for cancer, cardiovascular
disease, infectious disease and neurological disorders. The
company has experienced increasing demand for gene-based and
esoteric tests compared to routine tests on account of increased
esoteric mix contributed by Athena and Celera.
As part of this strategy, in Jan 2014, Quest Diagnostics
announced a multi-year deal with Life Technologies. Per the
deal, Quest Diagnostics can use Life Technologies' Ion Torrent, a
next-generation sequencing (NGS) platform for the development of
Quest Diagnostics has also signed a similar agreement with
) whereby it will be allowed to use the latter's MiSeq sequencing
and genotyping technology platform and related reagents for
molecular laboratory-developed tests. These deals are consistent
with the company's aim of becoming a global leader in diagnostic
and healthcare services. Quest Diagnostics has been working on
strengthening its suite of diagnostic tests for quite some time
However, we remain cautious about Quest Diagnostics' fate
going forward as it is continuously witnessing challenges with
regard to testing volume and reimbursement cuts. Concerns also
linger about the soft industry trends due to a decline in
physician office visits, flat pricing and low organic
Moreover, a disappointing fiscal 2014 guidance reflects no
improvement in the industry trend going forward, which adds to
The stock retains a Zacks Rank #2 (Buy). Another player in the
broader medical sector is
St. Jude Medical Inc.
) carrying a similar Zacks Rank #2.
QUEST DIAGNOSTC (DGX): Free Stock Analysis
ILLUMINA INC (ILMN): Free Stock Analysis
LABORATORY CP (LH): Free Stock Analysis
ST JUDE MEDICAL (STJ): Free Stock Analysis
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