We recently reiterated our Neutral recommendation on
), the leading providers of commercial laboratory services in
North America, with a target price of $61.00.
The company reported adjusted earnings per share (EPS) of
$1.18 in the third quarter of 2012, flat year over year and in
line with the Zacks Consensus Estimate. Revenues were down 2.9%
year over year to $1.85 billion, nominally missing the Zacks
Consensus Estimate of $1.88 billion.
The overall soft industry trends leading to low volume growth
was a dampener for the company. This low growth rate was
primarily due to a challenging volume environment for testing
laboratories and utilization weaknesses across the healthcare
sector. Low level of employment and slow growth of commercially
insured lives will continue to affect the company's overall
growth until the economy rebounds.
This also led the company to lower its fiscal 2012 revenue
guidanceto 0.5% (earlier outlook being 1%-2%), indicating that
the industry trend will not improve in the near future. The
company also lowered the higher end of its EPS guidance to $4.45-
$4.55 (previously $4.45- $4.60).
Laboratory Corporation of America Holdings
), is also experiencing the brunt of economic challenges as it
posted a meager 0.5% volume increase in the third quarter. The
reimbursement scenario remain challenging with an impending cut
of approximately 5% in the clinical lab fee schedule beginning
January 1, 2013.
To overcome these challenges, the company has undertaken
several strategies including cost control to drive its bottom
line. We are optimistic about the company's major organizational
restructuring, announced in October 2012, to increase operational
efficiency and restore growth.
This structural change will replace the company's existing
business structures with two new business groups - Diagnostic
Information Services and Diagnostic Solutions, effective January
1, 2013. According to the company, these structural changes will
eliminate three management layers representing 400-600 management
positions by the end of 2013, thereby making an annualized
savings of $65 million.
We are also optimistic that new management, introduced in May
2012, will likely bring in some changes in the key areas of
development. In this regard, the current CEO Mr. Rusckowski
presented the new Invigorate Plan, which is focused on improving
productivity while minimizing costs.
He prefers to re-assess the company's resource allocation,
internal investments, and geographic exposure in order to
optimize organic growth. The company also announced a voluntary
retirement program which is expected to deliver $40 million in
annualized cost savings, a portion of which will be realized in
the current fiscal (full amount to be realized at the end of the
first quarter of 2013).
We also 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 targeting fold-in
acquisitions instead of larger ones to restore top-line growth.
Quest carries a Zacks #3 Rank (Hold) in the short term.
QUEST DIAGNOSTC (DGX): Free Stock Analysis
LABORATORY CP (LH): Free Stock Analysis
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