Quest Diagnostics Retained at Neutral - Analyst Blog

A generic image of a calculator, a person holding a pen and papers laid out on a table.
Credit: Shutterstock photo

We reiterate our Neutral recommendation on Quest Diagnostics ( DGX ), one of the largest providers of commercial laboratory services in North America,with a target price of $58.00. The company provides diagnostic laboratory services through its nationwide network of laboratories and patient service centers.

Recently, management has begun a CEO succession process to identify a successor to Surya N. Mohapatra, President, Chairman and CEO. Dr. Mohapatra will continue to serve as Chairman and CEO for up to six months to ensure a smooth transition. In connection with this transition, the company expects to incur charges of approximately $14 million in the fourth quarter and early part of 2012.

Clinical testing revenues, which accounted for over 90% of total revenues, increased a nominal 1% year over year during the most recent quarter. However, revenues from clinical testing declined 1.5% before the contributions from Athena and Celera.

Quest recorded a 2.1% year-over-year increase in revenue per requisition although the 1.2% decline in volume came as a disappointment. The improvement in revenue per requisition was primarily due to the increased mix of esoteric tests from recent acquisitions, although the base revenue per requisition has remained relatively stable on a sequential basis throughout the year.

Economic uncertainty is taking a toll on the overall diagnostics industry, which is evident from third-quarter results of Quest's biggest competitor, Laboratory Corporation of America Holdings ( LH ). For LabCorp, both testing volume and revenue per requisition increased 2.1% and 7.8%, respectively owing to acquisitions and test mix shift.

However, the company has been witnessing a continuous decline in organic growth over the past few quarters (3% in first, 2% in second and 1.2% in the third quarter of fiscal 2011). With no significant job growth in the economy or an increase in commercially insured covered lives, the company's overall volume growth will continue to languish until the economy rebounds.

In such a scenario, Quest has been focusing on areas with high potential 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.

This is exemplified by 14% growth in gene based and esoteric testing during the reported quarter driven by the contribution of neurological testing from Athena, cardiovascular testing from Berkeley Heart and women's health testing (SureSwab).

Physician office visits continue to remain under pressure declining 6% during the quarter. Despite the current headwinds, the company's strong focus combined with positive long-term demographic trends should help retain its position as one of the leading players in the diagnostic industry.

Moreover, Quest is committed to increase shareholder returns through improving operating performance and a balanced capital deployment philosophy. Apart from its focus on the specialized testing business, the company is looking to improve its sales effectiveness and strengthen relationship with health plans and other payors.

Quest has announced a multi-year initiative to prepare for upcoming growth opportunities. The company aims to reduce its cost structure by $500 million over the next 3 years, targeting a 20% operating margin goal. The effort is in its initial stages and the company does not expect to realize any meaningful benefit until 2012 with the majority of savings expected to accrue in 2013 and 2014. The company is satisfied with the progress made so far in this respect and is confident about its ability to reach the goal.

QUEST DIAGNOSTC ( DGX ): Free Stock Analysis Report

LABORATORY CP ( LH ): Free Stock Analysis Report

Zacks Investment Research

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.

In This Story


Other Topics


Latest Markets Videos


    Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at

    Learn More