Quest Scans 2Q; Maintains FY13 View

Zacks

Leading player in the diagnostic testing market Quest Diagnostics Incorporated (DGX) discussed its current business environment and growth strategies at the Jeffries 2013 Global Healthcare Conference. Besides, it also reiterated its guidance for 2013.

Biz Environment

According to the company, the total health consumption expenditure in the U.S. was $2.4 trillion in 2012. Laboratory testing accounted for roughly $72 billion (or 3%) of the total health consumption expenditure. Quest holds 9% market share in the total U.S. lab market.

Although the U.S. market is highly fragmented, the company is well-placed with a dominant market share as it serves over a third of the total adult population in the U.S. Quest’s five-point strategy is likely to accelerate growth in the years to come.

Over the last four years, the market served by Quest grew at approximately 4% annually. The company expects the market growth rate to hover around 4% per year in the future.

Clinical bias towards precision medicine and disease-oriented personalized healthcare should foster growth going forward. Further, the company should gain from the Affordable Care Act from 2014 onwards.

Update on 2Q

Quest expects to report lower-than-prior year revenues and EPS in the second quarter of 2013 due to a tough comparable year-ago quarter. However, the company expects the second-quarter results to improve on a sequential basis from the first-quarter of 2013.

Management asserts that the company will gain momentum in the second half of 2013 as its efforts to revive growth and improve operational efficiency are expected to pay off. Further, Quest expects to gain from easier year-over-year comparisons in the second half of 2013.

Maintains Fiscal Outlook

Quest envisages revenues to remain flat on a year-over-year basis in 2013. The current Zacks Consensus Estimate of roughly $7.3 billion remains almost in line with the guided range.

EPS forecast lies in the range of $4.35−$4.55. The current Zacks Consensus Estimate of $4.35 tallies with the lower end of the guidance range. Moreover, Quest reaffirmed its expectation of $250 million of capital expenditure and $1.0 billion as cash provided by operations.

Our Take

Despite the dismal first-quarter 2013 results from Quest, we look forward to 2013 with optimism as the Invigorate cost savings program is expected to churn out higher benefits for the company in the second half. Although we hold a favorable view regarding Quest’s massive organizational restructuring strategy, near-term softness is a matter of concern.

The stock carries a Zacks Rank #3 (Hold). While we have a neutral stance on Quest, other stocks such as Myriad Genetics Inc. (MYGN), Natus Medical Inc. (BABY) and Haemonetics Corporation (HAE) are worth considering. These stocks carry a Zacks Rank #1 (Strong Buy).

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