Quest Diagnostics (DGX) Tops Q4 Earnings, 2018 View Strong

Quest Diagnostics Inc.'s (NYSE:DGX) fourth-quarter 2017 adjusted earnings per share (EPS) of $1.40 beat the Zacks Consensus Estimate by 3 cents and the year-ago number by 6.9%.

Adjusted EPS in the reported quarter excluded certain tax benefit recorded as a result of the Tax Cuts and Jobs Act (TCJA). The reported EPS came in at $1.82, a 67% surge from the year-ago quarter figure.

Full-year adjusted EPS came in at $5.67 per share, a 10.1% increase from the year-ago adjusted number and 2 cents ahead of the Zacks Consensus Estimate.

Reported revenues in the fourth quarter inched up 4.1% year over year to $1.936 billion, marginally in line with the Zacks Consensus Estimate. According to the company, 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 2.4% year over year in the fourth quarter. Also, revenue per requisition increased 2.1%. Diagnostic information services revenues in the quarter rose 4.5% 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 38.3%, reflecting a 66 basis points (bps) expansion year over year.

Among the operating expenses, selling, general and administrative expenses increased 13.3% to $453 million in the reported quarter. Accordingly, adjusted operating margin showed a contraction of 125 bps to 14.9%.

Quest Diagnostics exited the year 2017 with cash and cash equivalents of $137 million as compared to $359 million in the year-ago quarter. Full-year net cash provided by operating activities was $1.18 billion, compared with $1.07 billion in the year-ago period.

In the fourth quarter, the company repurchased 1 million shares for $100 million. As of Dec 31, 2017, Quest Diagnostics was left with $917 million of authorization under the previous share repurchase plan.

Outlook

Quest Diagnostics has provided its 2018 guidance. Excluding the impact of special items, amortization expense and ETB (excess tax benefit associated with stock based compensation), adjusted EPS for full-year is projected in the range of $6.50 to $6.70. The Zacks Consensus Estimate of $6.10 falls below the guided range.

Revenues for 2018 are expected in the range of $7.7 billion to $7.77 billion (annualized growth of 4–5%). The current Zacks Consensus Estimate for revenues is pegged at $7.94 billion, ahead of the company’s projected range.

Operating cash flow for 2018 is expected at around $1.3 billion. The current estimates for capital expenditure are pegged at $350–$400 million.

Our Take

Quest Diagnostics’ fourth-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.

On the flip side, in the last couple of years, Quest Diagnostics faced several reimbursement issues hurting its revenues. The company is concerned about the CMS (Centers for Medicare & Medicaid Services) proposal related to Protecting Access to Medicare Act.

Notably in December, the company as a key member of the American Clinical Laboratory Association (“ACLA”) has come forward to support a lawsuit filed by ACLA against the Acting Secretary of the US Department of Health and Human Services (HHS). The lawsuit charged that the CMS, operating under the purview of HHS, has failed to follow a congressional directive to implement a market-based laboratory payment system.

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 #3 (Hold). A few better-ranked stocks that reported solid earnings this season are PetMed Express (NASDAQ:PETS) , PerkinElmer (NYSE:PKI) and Accuray (NASDAQ:ARAY) . While PetMed sports a Zacks Rank #1 (Strong Buy), PerkinElmer and Accuray carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed recently reported third-quarter fiscal 2018 results with adjusted earnings per share of 44 cents. The bottom line soared 88.3% year over year. Revenues in the reported quarter rose 13.7% on a year-over-year basis to $60.1 million.

PerkinElmer released fourth-quarter 2017 adjusted earnings per share of 97 cents. Adjusted revenues were approximately $641.6 million, up from $567 million in the year-ago quarter.

Accuray reported a loss of 6 cents per share in second-quarter fiscal 2018, narrower than the year-ago figure by 5 cents. The top line improved 15% year over year to $100.3 million.

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