Quest Beats, Guides in line - Analyst Blog

Quest Diagnostics (DGX) reported an EPS of 97 cents during the fourth quarter of fiscal 2010, surpassing the Zacks Consensus Estimate of 91 cents although unchanged from the year-ago quarter. Earnings during the quarter included charges associated with workforce litigation and employment reduction, offset by a favorable tax resolution. For the full year the EPS came in at $4.06, ahead of both the Zacks Consensus Estimate of $3.98 and the previous year's $3.88.

Revenues for the quarter declined 1.3% year over year to $1,824 million, which exceeded the Zacks Consensus Estimate of $1,801 million. Despite a decline in revenues EPS remained unchanged due to the 7.8% reduction in the number of outstanding shares. For fiscal 2010, revenues came in at $7,368.9 million, down 1.2% from 2009 but surpassing the Zacks Consensus Estimate of $7,346 million.

Clinical testing revenues, which account for most of Quest's sales, declined 1.4% compared to the prior year. While clinical testing volume (measured by the number of requisitions) during the quarter increased by 0.1% compared with the year-ago period, revenue per requisition was lower by 1.5% and remained in line with the past two quarters. The positive volume growth reported by the company is after several quarters of disappointment.

Operating margin for the reported quarter declined to 16.1% on an operating income of $294 million compared to 17.9% in the year-ago period on an operating income of $330 million. Decline in revenue coupled with a 0.8% decline in operating costs brought down the operating margin. Charges during the fourth quarter brought down margin by 100 basis points.

Quest exited 2010 with $449.3 million in cash and cash equivalents, down from $534.3 million at the end of December 2009. Based on a strong cash balance, the company plans to reward its shareholders in the form of share buybacks and suitable acquisitions. During the fiscal, the company repurchased $750 million of common shares. The company also announced an additional $750 million buyback program bringing the current authorization to $1,000 million.

Outlook

Quest provided its outlook for 2011. The company expects to report EPS of $4.10-$4.30 banking on a 1% growth in revenue. The Zacks Consensus Estimate of $4.29 on $7,441 million of revenue is already towards the upper end of the guidance. Quest expects operating margin to be around 18% and to generate $1,100 million in cash from operations. In addition, the company expects to incur capital expenditure of $220 million.

Recommendation

Quest is confident about its long-term potential. The company continues to remain focused on gene-based and esoteric testing along with increasing sales effectiveness and improvement in operational efficiency. 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).