Quest Diagnostics Ups View on Solstas Buy

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With the declaration of the closure of its earlier announced acquisition of Solstas Lab Partners Group and its subsidiaries, Quest Diagnostics Inc. (DGX) also raised its 2014 financial outlook.

With the completion of the aforesaid buyout, the company now expects 2014 adjusted earnings per share (EPS) in the range of $3.95 and $4.15 (up from the earlier provided band of $3.90 and $4.10) on annualized revenue growth of 2% to 4% (up from the earlier range of flat to 2% over the 2013 level). The current Zacks Consensus Estimate for EPS of $4.03 remains within the expected range. The same for revenues is pegged at $7.2 billion.

Quest Diagnosticsalso asserted that this guidance takes into consideration unfavorable winter conditions during the month of Feb 2014. According to the company, in the first quarter of 2014, adverse climate conditions will impact adjusted EPS by 10 cents.

About the Solstas Deal

As declared earlier, Solstas Lab Partners Group and its subsidiaries were to be bought by Quest Diagnostics for approximately $570 million. Greensboro, N.C.-based Solstas is a full-service commercial laboratory company. According to Quest Diagnostics, the integration of its advanced diagnostic services with the wide client network of Solstas in Southeast U.S. should boost healthcare solutions in the region. The transaction is expected to benefit Quest Diagnostics by adding nearly 5% to annualized revenues, about 1% of which would be from professional lab services.

We note that this deal is in line with Quest Diagnostics’ robust and consistent inorganic growth strategy. In a bid to enhance its diagnostics services, the company had acquired ConVerge Diagnostic Services and the lab-related operations of Dignity Health and UMass Memorial Medical Center in 2013. These buyouts were consistent with the company’s five-pronged strategy which includes plan for disciplined capital deployment. Under the same strategy, in September, it divested its Enterix colorectal cancer screening test business to Clinical Genomics Technologies Pty Ltd.

Moreover, Quest Diagnostics has been focusing on high-potential areas such as gene-based esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. We are also upbeat about the long-term growth drivers that are expected to deliver positive outcomes in the upcoming period.

At the same time, we remain cautious about Quest Diagnostics’ fate going forward as it is continuously witnessing challenges with regard to testing volume and reimbursement cuts. Concerns also linger about the soft industry trends due to a decline in physician office visits, flat pricing and low organic revenues.

The stock currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the broader healthcare industry are Align Technology Inc. (ALGN), CR Bard Inc. (BCR) and Becton, Dickinson and Company (BDX). All these stocks carry a Zacks Rank #2 (Buy).

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