Quest Diagnostics (DGX) Tops Q1 Earnings, Raises '17 View

Quest Diagnostics’ (NYSE:DGX) first-quarter 2017 adjusted earnings per share (EPS) of $1.33 came in 13.7% ahead of the Zacks Consensus Estimate and exceeded the year-ago number by 17.7%.

Adjusted EPS in the reported quarter excludes charges related to restructuring and integration, retirement of debtas well as amortization expenses. Reported EPS in the first quarter came in at $1.16, representing a year-over-year surge of 63.4%.

Reported revenues for the first quarter inched up 1.9% year over year to $1.89 billion, ahead the Zacks Consensus Estimate of $1.87 billion. According to the company, the year-over-year improvement came on the back of expanding relationships with hospital health systems and strength in several of the company’s advanced diagnostic offerings.

Volume (measured by the number of requisitions) increased 3.5% year over year during the first quarter. Revenue per requisition, however, was down 0.2%. Diagnostic information services revenues in the quarter grew 3.2% on a year-over-year basis to $1.81 billion.

Among operating expenses, cost of services during the reported quarter was $1.16 billion, up 1.8% year over year. Gross margin came in at 38.7%, a rise of 6 basis points (bps) year over year.

Selling, general and administrative expenses dropped 1.1% to $437 million in the reported quarter. Adjusted operating margin showed an improvement of 77 bps to 15.6%.

Quest Diagnostics exited the first quarter with cash and cash equivalents of $367 million, which marked a 2.2% rise from the year-ago quarter. Net cash provided by operating activities was $196 million compared with $153 million in the year-ago period.

In the first quarter, the company repurchased 1.6 million shares for $150 million. As of Mar 31, 2017, Quest Diagnostics was left with $1.2 billion of authorization under the approved share repurchase plan.

Outlook

Quest Diagnostics reiterated its full-year 2017 revenue guidance. The company expects full-year revenues to be within the range of $7.64 billion to $7.72 billion (annualized growth of 2–3%). The current Zacks Consensus Estimate for revenues is pegged at $7.67 billion, close to the lower end of the company’s guided range.

In addition, the company’s 2017 adjusted EPS range has been raised to $5.45–$5.60 from the earlier forecast of $5.37–$5.52. The Zacks Consensus Estimate of $5.44 remains below this range.

Operating cash flow for 2017 is expected to reach $1.1 billion, unchanged from previous guidance. The current estimates for capital expenditure remain within the range of $250–$300 million (unchanged).

Our Take

Quest Diagnostics’ first-quarter earnings and revenues duly exceeded the Zacks Consensus Estimate. The company is currently refocusing on its core diagnostic information services business and working on delivering disciplined capital deployment.

We are also highly optimistic about the company’s focus on continued execution of its five-point strategy. According to Quest Diagnostics, its planned divestiture of the Focus Diagnostics products business is part of its broader strategy to refocus on diagnostic information services. In addition, several new relationships with hospitals and integrated delivery networks were the other growth drivers. Particularly, the company is positive about its recent agreement with PeaceHealth in the Pacific Northwest, which is expected to further bolster growth, later in 2017.

However, over the past several quarters, the overall soft industry trends, leading to a low volume environment, acted as a dampener for the company.

Zacks Rank & Key Picks

Currently, Quest Diagnostics carries a Zacks Rank #2 (Buy).

Some other stocks worth considering in the broader medical sector include Inogen Inc. (NASDAQ:INGN) , Hologic, Inc. (NASDAQ:HOLX) and Sunshine Heart Inc (NASDAQ:SSH) . Each of these stocks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inogen has a long-term expected earnings growth rate of 17.50%. The stock registered an impressive one-year return of 64.2%.

Hologic has a long-term expected earnings growth rate of 11.33%. The stock registered a solid one-year return of roughly 21.3%.

Sunshine Heart posted a positive earnings surprise of 58.24% in the last reported quarter. The stock has a stellar EPS growth record (last three–five years of actual earnings) of almost 22%.

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