Quest Diagnostics’ (DGX) fourth-quarter 2014 adjusted earnings per share (EPS) from continuing operations of $1.08 exceeded the Zacks Consensus Estimate by 3 cents and the year-ago number by 4.9%.
Adjusted EPS in the reported quarter excludes benefits from the favorable resolution of tax contingencies as well as restructuring and integration charge costs associated with recent acquisitions and the company's ongoing efforts to drive operational excellence and simplify the organization. Reported EPS in the fourth quarter came in at $1.26, a 29.9% improvement from the year-ago equivalent of 97 cents.
For full year 2014, adjusted EPS from continuing operations was $4.10, up 2.5% from the year-ago adjusted figure and ahead of the Zacks Consensus Estimate of $4.06.
Revenues from continuing operations for the fourth quarter were up 7.2% year over year to $1.90 billion, beating the Zacks Consensus Estimate of $1.84 billion. Full year sales totaled $7.4 billion, up 4% year over year and in line with the Zacks Consensus Estimate.
Organic revenues from continuing operations inched up 0.6% year over year. Volume (measured by the number of requisitions) increased 8.8% year over year. Revenue per requisition was 1.5% lower than a year ago. Excluding acquisitions, revenue per requisition for diagnostic information services was flat year over year.
Among operating costs, cost of services during the reported quarter stood at $1.18 billion, up 12.7% year over year. Gross margin stood at 37.1%, recording a contraction of 303 basis points (bps) year over year.
Selling, general and administrative (SG&A) expenses increased 2.9% to $427 million. Accordingly, adjusted operating margin in the quarter contracted 207 bps to 14.4% on adjusted operating income of $272 million.
Quest Diagnostics exited the fiscal with $192 million in cash and cash equivalents, up from $187 million at the end of 2013. Full-year cash provided by operating activities was $938 million compared with $652 million in the same period last year.
In the quarter, the company repurchased 0.8 million shares for $50 million and was left with $696 million of authorization under the approved share repurchase plan. Besides, the board of directors authorized a 15% increase in its quarterly dividend to 38 cents from 33 cents, which translates into $1.52 per share annually.
Outlook
Quest Diagnostics provided its 2015 guidance. The company currently expects revenues to increase by 2% to 3% over 2014 levels. The current Zacks Consensus Estimate for revenues is pegged at $7.58 billion, falling near to the upper end of the growth guidance.
In addition, the company’s 2015 adjusted EPS expectation (excluding amortization expense) lies in the range of $4.70 to $4.85. The Zacks Consensus Estimate of $4.42 falls far below the guided range.
In addition, operating cash flow for 2015 is expected to remain at $850 million. Likewise, the estimate for capital expenditure is pegged at $300 million.
Our Take
Quest Diagnostics managed to post a better-than-expected fourth quarter with both earnings and revenues beating the respective Zacks Consensus Estimate. However, over the past several quarters, the overall soft industry trends leading to low volume growth have acted as a dampener for the company. In the fourth quarter, although volume increased on a year-over-year basis, excluding acquisitions, revenue per requisition for diagnostic information services was essentially unchanged.
However, the solid EPS and revenue guidance indicates the fact that the company expects industry trends to improve in the near future. Nevertheless, lower healthcare utilization and reimbursement cuts still act as major deterrents. Although, the company is claiming to see some signs of improving healthcare utilization, near-term outlook is bleak.
Nevertheless, Quest Diagnostics has been focusing on areas with high potential such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. We are also upbeat on the long-term growth drivers that are expected to show positive outcomes in the upcoming period.
The stock retains a Zacks Rank #3 (Hold). However, some better-ranked players in the same sector are Amedisys Inc. (AMED), RadNet, Inc. (RDNT) and AmSurg Corp. (AMSG), all carrying a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment