Quest Diagnostics (DGX) is scheduled to release its second quarter fiscal 2010 earnings on July 21, 2010. The company is expected to earn $1.06 during the quarter, according to the Zacks Consensus Estimate.
Previous Quarter Highlights
Quest Diagnostics reported first quarter fiscal 2010 earnings per share (EPS) of 89 cents, unchanged from the year-ago period. However, excluding the impact of severe weather conditions and charges associated with workforce reduction, Quest’s EPS came in at $1.00, beating the Zacks Consensus Estimate by a couple of cents. Revenues for the quarter remained unchanged at $1.8 billion.
Clinical testing revenues, which account for most of Quest’s sales, declined 0.4% compared with the prior year. While underlying volume in clinical testing (measured by the number of requisitions) during the quarter declined 2.6%, revenue per requisition increased 2.3% compared with the year-ago period. Quest witnessed increased demand for gene-based and esoteric tests.
Agreement of Analysts
Estimate revision trends among the analysts depict a negative bias for the company’s earnings in the June quarter. Over the last 30 days, 2 of the 19 analysts covering the stock have made downward revisions for the quarter ended June. Moreover, in the last 7 days, 1 analyst has lowered the estimates. No upward revision has taken place for this quarter.
We also note that the scenario improves in the third quarter where 1 analyst has increased estimates in the last 7 days and 30 days. However, Quest has witnessed a lowering of estimate by 1 analyst in the last 30 days. The Zacks Consensus Estimate for the third quarter is $1.10.
Along with the first quarter results, Quest Diagnostics also updated its outlook for 2010. Although adjusted earnings from continuing operations remained unchanged at $4.10 – $4.30, the expected growth in revenues was brought down to 1%–2% compared with the earlier level of 3%–4%. The lower revenue guidance reflects the impact of severe weather conditions.
Moreover, the company continues to struggle from declining volumes; there was a fall of 2.6% during the first quarter. We do not expect the situation to improve much in the second quarter.
Magnitude of Estimate Revisions
The magnitude of revisions is moderate following the first quarter results. Overall, estimates for the second quarter have gone down from $1.08 to the current level of $1.06 per share in the last 90 days. For fiscal 2010, estimates have slipped from $4.21 to $4.18 per share currently over the past 3 months. A similar trend can be seen for 2011, with estimates going down by 4 cents to $4.59 in the last 90 days.
Surprise
Going by past trends, we expect Quest to likely exceed estimates. Although the company’s reported EPS missed expectations in the previous quarter, it has a positive four-quarter average of 1.12%. This means that on an average, Quest has topped the Zacks Consensus Estimate by 1.12% over the last four quarters.
Our Recommendation
We believe the company should be able to retain its growth momentum as a growing and aging population is driving the demand for clinical testing. We are also impressed by Quest’s increasing focus on gene-based and other esoteric testing, which are generally reimbursed at higher levels than routine tests. However, the tough competitive scenario is a concern. Moreover, the decline in testing volume is hurting the company’s top line.
We currently have a Neutral recommendation on the stock.
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