The announcement of Quest Diagnostics’ (DGX)
first quarter of fiscal 2011 results as on April 20, 2011, has
triggered analysts to revise estimates downwards.
Previous quarter highlights
Quest Diagnostics 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%
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
revenues (1% growth as per previous guidance). This reflects a 1%
increase based on 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.
For a full coverage on the earnings, read: Quest Diagnostics
Beats by a Penny
Agreement of Analysts
Following the release of first quarter results, estimate
revision trends among analysts depict a negative bias for the
company’s earnings in the forthcoming periods. Over the last 7
days, 4 of the 21 analysts covering the stock have lowered their
revisions for the second quarter of fiscal 2011, with no revision
in the opposite direction.
Moreover, in the past 30 days, 15 analysts have lowered their
estimates for the second quarter with only one moving in the
reverse direction. However, the situation improves a bit in the
second half of 2011.
For the third quarter, 5 analysts lowered their estimates with 4
in the opposite direction in the last 30 days. For fiscal 2011, out
of 19 analysts, 14 have reduced their estimates in the last 30 days
with no upward revisions.
After several quarters of declining clinical testing volume,
Quest recorded a positive 0.1% volume growth during the fourth
quarter of 2010. It is encouraging to note that volume growth
improved further to 2% during the first quarter of 2011. Moreover,
physician office visits (Quest derives 80% of its business from
physician office visits), though down, is showing some improvement
and is not expected to change significantly from the current level
thereby resulting in some stability going forward.
Revenue per requisition continues to be under pressure ever
since the contracts were renewed during the second quarter of 2010.
However, with the completion of one year of this event, the company
expects stability in revenue per requisition in the second half of
2011. The situation of the company reflects the estimate revision
trends by the analysts that improve as the year progresses.
Adjusted operating margin in the reported quarter declined to
16.3% compared to 18.1% in the year-ago period. Higher operating
costs and expenses related to salaries and wages resulted in lower
operating margin. However, the company is striving to better manage
its cost structure, evaluate a number of new opportunities and
bring about quality improvements.
To meet these objectives, Quest has made investments in the
recent past in sales and service, which are temporarily
pressurizing margins. However, over a longer time period, these
investments should result in accelerated revenue growth and margin
expansion.
To benefit in the long term, Quest is focusing on areas with
high potential such as gene-based, esoteric and anatomic pathology
testing, which accounted for approximately 36% of the company’s
total revenue in 2010.
Quest continues to face challenges as its anatomic pathology
still sees a drop in revenues. This is significant as this
high-margin business contributes about 14% of the company’s total
sales. Moreover, low-margin drugs-of-abuse testing recorded an 11%
growth during the quarter, though the contribution to the volume
was modest (0.5%).
Magnitude of Estimate Revisions
The magnitude of revisions is modest following the first quarter
results. Overall, estimates for the next quarter have gone down by
4 cents to $1.14 while third-quarter estimate remained unchanged at
$1.17. Estimates for fiscal 2011 also witnessed a decline of 8
cents to $4.36 over the last 30 days.
Our Recommendation
We appreciate Quest’s move of repurchasing shares and paying
dividends to drive shareholder value. Besides, the company is
adopting strategies such as suitable acquisitions, increased sales
force and targeting additional geographies to drive its top
line.
With positive volume growth during the quarter coupled with
expected stability in pricing from the second half of 2011, the
company is gearing for a gradual recovery. We are encouraged by
Quest’s strong portfolio of tests, many of which are finding
greater acceptance with time.
We have a ‘Neutral’ recommendation on the stock which
corresponds to the Zacks # 3 Rank (Hold).
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years
ago that earnings estimate revisions are the most powerful force
impacting stock prices. He turned this ground breaking discovery
into two of the most celebrating stock rating systems in use today.
The Zacks Rank for stock trading in a 1 to 3 month time horizon and
the Zacks Recommendation for long-term investing (6+ months). These
“Earnings Estimate Scorecard" articles help analyze the important
aspects of estimate revisions for each stock after their quarterly
earnings announcements. Learn more about earnings estimates and our
proven stock ratings at http://www.zacks.com/education/
CELERA CORP (CRA): Free Stock Analysis Report
QUEST DIAGNOSTC (DGX): Free Stock Analysis Report
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