Quest Diagnostics Beats by a Penny - Analyst Blog
April 20 2011 - 08:54AM
Zacks
Quest Diagnostics (DGX) reported an adjusted
EPS of $1.00 during the first quarter of fiscal 2011, a penny above
the Zacks Consensus Estimate and the year-ago quarter. Revenues for
the quarter increased 1% year over year to $1.8 billion, in line
with the Zacks Consensus Estimate. A 10.5% decline in the number of
outstanding shares had a favorable impact on earnings.
The adjusted earnings in the reported quarter excludes the
impact of severe weather (7 cents), costs associated with workforce
reduction (5 cents) and recent transactions (2 cents) related to
Athena Diagnostics and Celera Corporation (CRA).
The year-ago period also witnessed the impact of severe weather (5
cents) and restructuring charges (6 cents).
Clinical testing revenues, which account for most of Quest’s
sales, increased 0.3% compared to the prior year. While clinical
testing volume (measured by the number of requisitions) during the
quarter increased by 2% compared with the year-ago period, revenue
per requisition was lower by 1.7%. The impact of a severe weather
during the quarter reduced revenues and volume by 1.4%.
Adjusted operating margin for the reported quarter declined to
16.3% on an operating income of $301 million compared to 18.1% in
the year-ago period on an operating income of $330 million. Higher
operating costs and expenses resulted in lower operating
margin.
Quest exited the quarter with $994.2 million in cash and cash
equivalents, up from $449.3 million at the end of December 2010.
Cash flow from operations during the quarter was $161 million, down
from $239 million in the corresponding period of last year.
Based on a strong cash balance, the company rewards its
shareholders in the form of share buybacks and suitable
acquisitions. During the quarter, the company repurchased $835
million worth of common shares.
With the recent acquisition of Athena Diagnostics from
Thermo Fisher Scientific (TMO), Quest is confident
about strengthening its presence in the neurology diagnostics
market. Moreover, the proposed acquisition of Celera will bolster
its cardiovascular testing portfolio.
To fund the acquisition of Athena Diagnostics and to repay a
part of its debt, in March 2011, Quest had offered senior notes
worth $1.25 billion in four parts. As a result, the long-term debt
of the company increased to $3.5 billion compared to $2.6 billion
at the end of the fiscal.
Outlook
Quest updated its outlook for 2011. The company expects to
report an adjusted EPS of $4.25-$4.45 banking on a 2% growth in
revenue (1% growth as per previous guidance). This reflects a 1%
increase from the impact of the Athena acquisition.
The company expects operating margin to be around 17.5%−18%
(adjusted) and to generate $1.1 billion in cash from operations. In
addition, the company expects to incur capital expenditure of $220
million.
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 geographical
regions to drive its top line.
Based on favorable demographic trends and strong focus, Quest
will continue to remain one of the leading players in the industry.
However, the macro environment continues to be a major concern and
is negatively impacting testing volume.
We currently have a Neutral recommendation on Quest Diagnostics,
which is also supported by the Zacks #3 Rank (Hold).
CELERA CORP (CRA): Free Stock Analysis Report
QUEST DIAGNOSTC (DGX): Free Stock Analysis Report
THERMO FISHER (TMO): Free Stock Analysis Report
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