Quest Diagnostics (DGX) Beats Earnings In Q3, Updates View

Quest Diagnostics Inc.'s (NYSE:DGX) third-quarter 2017 adjusted earnings per share (EPS) of $1.39 beat the Zacks Consensus Estimate by 2.9% and the year-ago number by 1.5%.

Adjusted EPS in the reported quarter excluded charges related to restructuring and integration, retirement of debt, gain on disposition of business as well as amortization expenses. The reported EPS came in at $1.15, a 14.2% slip from the year-ago quarter figure.

Reported revenues in the third quarter inched up 2.4% year over year to $1.93 billion. The quarter’s number however remained in line with the Zacks Consensus Estimate. According to the company, in spite of weather challenges, the year-over-year improvement came on the back of successful execution of its two-point strategy of accelerating growth and driving operational excellence.

Volume (measured by the number of requisitions) increased 1.6% year over year in the third quarter. Also, revenue per requisition increased 1.2%. Diagnostic information services revenues in the quarter rose 2.8% on a year-over-year basis to $1.85 billion.

Cost of services during the reported quarter was $1.19 billion, up 2.9% year over year. Gross margin came in at 38.4%, reflecting a 25 basis points (bps) contraction year over year.

Among the operating expenses, selling, general and administrative expenses increased 3.4% to $423 million in the reported quarter. Accordingly, adjusted operating margin showed an contraction of 45 bps to 16.5%.

Quest Diagnostics exited the third quarter with cash and cash equivalents of $350 million, which marked an 11.5% rise from the preceding quarter. Year-to-date net cash provided by operating activities was $852 million, compared with $765 million in the year-ago period.

In the third quarter, the company repurchased 0.6 million shares for $65 million. As of Sep 30, 2017, Quest Diagnostics was left with $1 billion of authorization under the previous share repurchase plan.

Outlook

Considering the impact of hurricanes in the third quarter, especially on the company's operations in Florida, Texas and Puerto Rico, as well as recently closed acquisitions, Quest Diagnostics has updated its full-year 2017 guidance.

The company now expects full-year reported revenues of approximately $7.71 billion (annualized growth of approximately 3%) as compared to the earlier stated range of $7.69 billion to $7.74 billion (annualized growth of 2.6–3.4%). The current Zacks Consensus Estimate for revenues is pegged at $7.69 billion, lower than the company’s projected number.

In addition, the upper-end of the company’s earlier-provided 2017 adjusted EPS range has been reduced. Currently Quest Diagnostics expects earnings for the full year to remain in the band of $5.62–$5.67 from earlier forecast of $5.62–$5.72. The Zacks Consensus Estimate of $5.63 falls within but near to the lower-end of the projected band.

Operating cash flow for 2017 is expected at around $1.2 billion, unchanged from the previous guidance. The current estimates for capital expenditure are pegged at $250–$300 million (unchanged).

Our Take

Quest Diagnostics’ third-quarter earnings exceeded the Zacks Consensus Estimate, while revenues remained in line with the same. On a positive note, the company is currently refocusing on its core diagnostic information services business and working on disciplined capital deployment. We are also highly optimistic about the company’s focus on its two-point strategy.

The company’s several new collaborations with hospitals and integrated delivery networks continue to act as major growth drivers. We are currently looking forward to the company’s recently-announced strategic relationship with Cleveland Clinic which includes the acquisition of Cleveland HeartLab.

On the flip side, Quest Diagnostics faced major sales disruption due to hurricanes in Florida and Texas, where the company has a significant presence. Also hurricanes in Puerto Rico and the earthquake in Mexico affected Quest Diagnostics’ overall performance in the reported quarter. With this the company has to reduce the upper-end of its earlier provided full-year earnings guidance range, which is disappointing.

Notably, the company has not positively taken the latest Centers for Medicare and Medicaid Services (CMS) publication of proposed 2018 Medicare reimbursement rates for clinical laboratory tests under the Clinical Lab Fee Schedule (CLFS). It is currently requesting CMS to delay the implementation of PAMA (Protecting Access to Medicare Act).

Zacks Rank & Key Picks

Currently, Quest Diagnostics carries a Zacks Rank #4 (Sell).

A few better-ranked stocks in the broader medical sector are Integra LifeSciences Holdings Corp. (NASDAQ:IART) , Abbott (NYSE:ABT) and Thermo Fisher Scientific Inc. (NYSE:TMO) . All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Integra LifeSciences has a long-term expected earnings growth rate of 10.8%. The stock rallied roughly 19% over the last six months.

Abbott has a long-term expected earnings growth rate of 10.7%. The stock gained 36.9% last year.

Thermo Fisher has a long-term expected earnings growth rate of 11.7%. The stock gained 24.8% last year.

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