Quest Diagnostics: Earnings Beat, Revenues Miss the Mark

Quest Diagnostics ' DGX third-quarter 2015 adjusted earnings per share (EPS) of $1.28 exceeded the Zacks Consensus Estimate by a penny and improved from the year-ago number by 6.7%.

Adjusted EPS in the reported quarter excludes gain on the contribution to Q Squared Solutions as well as charges related to restructuring and integration costs, coupled with the ongoing efforts to drive operational excellence. Reported EPS in the third quarter came in at $2.35, up an impressive 167% year over year.

Revenues for the third quarter declined 1.05% year over year to $1.88 billion, marginally short of the Zacks Consensus Estimate of $1.89 billion. However, excluding the clinical trials' business contribution to the joint venture, revenues increased 0.9% year over year.

Volume (measured by the number of requisitions) declined 0.2% year over year. Revenue per requisition, however, grew 0.2% year over year. Diagnostic information services revenues in the quarter remained flat on a year-over-year basis.

Among operating costs, cost of services during the reported quarter was $1.16 billion, down 1.4% year over year. Gross margin came in at 38.2%, up 6 basis points (bps) year over year.

Selling, general and administrative (SG&A) expenses dropped 9.9% to $402 million in the reported quarter. Adjusted operating margin showed an improvement of 210 bps to 16.8% on adjusted operating income of $316 million (up 12.9% year over year).

Quest Diagnostics exited the third quarter with strong cash and cash equivalents of $123 million, down 18% from $150 million at the end of the second quarter of 2015. Year to date, cash provided by operating activities was $539 million compared with $635 million in the comparable period last year. The reduced cash flow was a result of the negative impact of a payment against certain tax reserves.

During the quarter, the company repurchased 0.3 million shares for $25 million and was left with $522 million of authorization under the approved share repurchase plan.


Quest Diagnostics has updated its 2015 guidance. The company now expects revenues at the lower end of its earlier provided guidance range of $7.49-$7.57 billion, reflecting annualized growth of 2%. The current Zacks Consensus Estimate for revenues is pegged at $7.53 billion, way above the guidance.

In addition, the company's 2015 adjusted EPS expectation (excluding amortization expense) has been narrowed to $4.75-$4.80 from the earlier guided range of $4.70 to $4.85. The Zacks Consensus Estimate of $4.75 falls at the lower end of the guided range.

In addition, adjusted operating cash flow for 2015 is expected to exceed $850 million (unchanged). The current estimate for capital expenditure is $275 million, a drop from the previous guidance of $300 million.

Our Take

Quest Diagnostics has delivered a mixed third-quarter 2015. While the company managed to post better-than-expected earnings, it closely missed the Zacks Consensus Estimate on the revenue front. Over the past several quarters, the overall soft industry trends leading to low volume environment have acted as a dampener for the company.

However, Quest Diagnostics is leaving no stone unturned to return to the growth trajectory. The company is currently refocusing on its core diagnostic information services business and working on delivering disciplined capital deployment. We are also highly optimistic about its recently formed joint venture with Quintiles under which it has announced new companion diagnostic solutions for two recent FDA-approved therapies for non-small cell lung cancer. We believe this joint venture will boost Quest Diagnostics' clinical trials testing business to a great extent.

Zacks Rank

The stock carries a Zacks Rank #4 (Sell). Some of the better-ranked players in the broader medical sector are Amedisys Inc. AMED , AmSurg Corp. AMSG and RadNet, Inc. RDNT , all with a Zacks Rank #1 (Strong Buy).

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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 Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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