Quest Diagnostics (DGX) is scheduled to release its first quarter fiscal 2011 results on Wednesday, April 20, 2011 before the market opens. The company is expected to earn 99 cents during the quarter on $ 1,806 million in revenues, according to the Zacks Consensus Estimate.
Previous Quarter Highlights
Quest reported an EPS of 97 cents during the fourth quarter of fiscal 2010, surpassing the Zacks Consensus Estimate of 91 cents although unchanged from the year-ago quarter. Earnings during the quarter included charges associated with workforce litigation and employment reduction, offset by a favorable tax resolution.
Revenues for the quarter declined 1.3% year over year to $ 1,824 million, which exceeded the Zacks Consensus Estimate of $ 1,801 million. Despite a decline in revenues, EPS remained unchanged due to the 7.8% reduction in the number of outstanding shares.
Clinical testing revenues, which account for most of Quest’s sales, declined 1.4% compared to the prior year. While clinical testing volume (measured by the number of requisitions) during the quarter increased by 0.1% compared with the year-ago period, revenue per requisition was lower by 1.5% and remained in line with the past two quarters. The positive volume growth reported by the company came after several quarters of disappointment.
Quest provided its outlook for 2011. The company expects to report EPS of $ 4.10-$ 4.30 based on a 1% growth in revenue.
Agreement of Analysts
Estimate revision trends among the analysts have been insignificant in the last 30 days. Among 22 analysts covering the stock, only 1 analyst has lowered his or her estimate for the first quarter. For fiscal 2011, 2 analysts have increased their estimates with 3 downward revisions over the past 30 days. No revisions have taken place in the past 7 days.
After several quarters of declining clinical testing volume, the positive 0.1% growth during the fourth quarter of 2010 came as an encouragement. Following the renewal of majority of contracts during the second quarter of 2010, the company has witnessed stability in revenue per requisition. Moreover, physician office visits is not expected to change significantly in the near future thereby resulting in some stability going forward.
Revenues derived from anatomic pathology have been under pressure for the past few quarters driven by in-sourcing of the tests by physicians. Many health plans have made reimbursement policy changes to address over utilization due to in-sourcing of certain kinds of anatomic pathology testing.
Although in-sourcing has witnessed some leveling-off, it continues to be a major issue as the company derived 14% of total revenues from anatomic pathology during fiscal 2010.
At present, Quest is in an acquisition spree, the latest being the proposed acquisition of Celera Corporation (CRA). Earlier this month, the company completed the acquisition of Athena Diagnostics from Thermo Fisher Scientific (TMO) for $ 740 million.
Quest recorded 36% of its revenues from gene-based, esoteric and anatomic pathology testing in 2010. Contribution from this business should rise with the acquisition of Celera and Athena. We expect an update from the company on its revenue outlook after these acquisitions.
Its biggest competitor, Laboratory Corporation of America Holdings (LH) is also targeting a greater share of this business. Following the acquisition of Genzyme Genetics, LabCorp has set a target of recording 45% of its revenues from this specialty business in the next 3-5 years.
We also expect an update regarding the Empire Blue Cross Blue Shield contract status. Several providers were added to the contract from August 1, 2010, which was exclusive to Quest until then. During the last reported quarter, the company announced that though volume had been impacted with the inclusion of more providers, Quest was still able to hold on to substantial portion of the business.
Magnitude of Estimate Revisions
The magnitude of revisions has been modest following fourth quarter results. Overall, estimates for the first quarter have gone up by 2 cents to the current level of 99 cents per share in the last 90 days. For fiscal 2011, estimates have increased by 15 cents to the current level of $ 4.44 per share over the past 3 months.
Surprise
Barring the first quarter of fiscal 2010, Quest Diagnostics had exceeded estimates in the past four quarters. The four-quarter average of 1.11% indicates that on an average, Quest Diagnostics has exceeded the Zacks Consensus Estimate by 1.11% over the last four quarters.
Our Recommendation
We appreciate Quest Diagnostics’ move to repurchase shares and pay dividends to drive shareholder value. Besides, the company is adopting strategies such as making suitable acquisitions, increasing sales force and targeting additional geographies to drive its top line.
We are encouraged by Quest’s strong portfolio of tests, many of which are finding greater acceptance with time. Based on favorable demographic trends and strong focus, Quest will continue to remain one of the leading players in the industry.
We currently have a Neutral recommendation on Quest Diagnostics, which is also supported by the Zacks #3 Rank (Hold).
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