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Quest Diagnostics (DGX) Up 3.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
Banner (BANR) delivered earnings and revenue surprises of -4.81% and -3.46%, respectively, for the quarter ended March 2019. Do the numbers hold clues to what lies ahead for the stock?

It has been about a month since the last earnings report for Quest Diagnostics (DGX). Shares have added about 3.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Quest Diagnostics due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Quest Diagnostics Posts In Line Earnings, Revenue Per Requisition Falls in Q4

Quest Diagnostics fourth-quarter 2018 adjusted earnings per share (EPS) of $1.36 were on par with the Zacks Consensus Estimate. Adjusted earnings declined 1.4% from the year-ago number.

Reported EPS came in at 92 cents, reflecting a 49.5% decline from the year-ago quarter.

Adjusted earnings for the full year came in at $6.31 per share, a 16.9% improvement from the year-ago period. However, it lagged the Zacks Consensus Estimate of earnings of $6.33 per share.

Reported revenues in the fourth quarter were down 1.4% year over year to $1.84 billion and also missed the Zacks Consensus Estimate by 2.4%.

For 2018, the company registered revenues of $7.53 billion, up 1.7% from 2017. This however lagged the Zacks Consensus Estimate of $7.77 billion.

Quarterly Details

Volumes (measured by the number of requisitions) increased 3.4% year over year in the fourth quarter. However, revenue per requisition was down 5.5%. Diagnostic information services revenues in the quarter dropped 1.5% on a year-over-year basis to $1.76 billion.

Cost of services during the reported quarter was $1.24 billion, up 3.4% year over year. Gross margin came in at 32.8%, reflecting a 313-basis point (bps) contraction year over year.

Selling, general and administrative expenses declined 6.8% to $356 million in the reported quarter. Yet, adjusted operating margin showed a contraction of 201 bps to 13.5%.

Quest Diagnostics exited 2018 with cash and cash equivalents of $135 million, compared to $137 million at the end of 2017. Net cash provided by operating activities was $1.20 billion for 2018, compared with $1.17 billion in the year-ago quarter.

In the fourth quarter, the company repurchased 2 million shares of the common stock for $175 million. In the full year, the company repurchased 3.4 million shares for $325 million. As of Dec 31, 2018, Quest Diagnostics was left with $0.6 billion of authorization under the approved share repurchase plan.

Guidance Tweaked

Quest Diagnostics has provided its 2019 guidance. Excluding the impact of amortization expense, adjusted EPS for the full year is projected to be over $6.40. The Zacks Consensus Estimate is pegged at $6.59.

Revenues for 2019 are estimated in the band of $7.60 billion to $7.75 billion (annualized growth of roughly 1% to 3%). The current Zacks Consensus Estimate for revenues of $7.77 billion, exceeds the company’s projected figure.

Operating cash flow for 2019 is expected at around $1.3 billion. The current estimate for capital expenditure remains within the range of $350 million to $400 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -14.06% due to these changes.

VGM Scores

At this time, Quest Diagnostics has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Quest Diagnostics has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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