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Quest Diagnostics (DGX) Q3 Earnings Surpass, View Strong

Zacks Equity Research

Quest Diagnostics Incorporated’s DGX third-quarter 2019 adjusted earnings per share (EPS) of $1.76 surpassed the Zacks Consensus Estimate by 2.3%. Adjusted earnings also improved 4.8% from the year-ago number.

Reported EPS came in at $1.56, up 1.9% from the year-ago quarter as well.

Reported revenues in the third quarter rose 3.5% year over year to $1.96 billion. Moreover, the same beat the consensus estimate by 1%.

Quarterly Details

Volumes (measured by the number of requisitions) expanded 5.1% year over year in the third quarter (up 3.7% organically). However, revenue per requisition dipped 1.2%.

Diagnostic information services revenues in the quarter were up 3.7% on a year-over-year basis to $1.88 billion.

Cost of services during the reported quarter was $1.26 billion, up 3.4% year over year. Gross margin came in at 35.4%, reflecting a 7-basis point (bps) improvement from the year-ago figure.

Quest Diagnostics Incorporated Price, Consensus and EPS Surprise

Quest Diagnostics Incorporated Price, Consensus and EPS Surprise

Quest Diagnostics Incorporated price-consensus-eps-surprise-chart | Quest Diagnostics Incorporated Quote

Selling, general and administrative expenses increased 2.3% to $362 million in the quarter under review. Adjusted operating margin came in at 16.9%, representing a 30-bps expansion year over year.

Quest Diagnostics exited the quarter with cash and cash equivalents of $434 million compared with $273 million at the end of the second quarter. Year-to-date net cash provided by operating activities was $895 million compared with $905 million a year ago.

In the third quarter, the company repurchased 0.5 million shares of the common stock for $50 million. As of Sep 30, 2019, Quest Diagnostics was left with $0.4 billion of authorization under the approved share buyback plan.

2019 Guidance

Quest Diagnostics has updated its 2019 outlook. Adjusted EPS for the full year is projected within $6.45-$6.50, indicating a restraint from the earlier projection of above $6.40. The Zacks Consensus Estimate for the metric is pegged at $6.50, touching the upper end of the guided band.

Revenues for 2019 are estimated to be around $7.72 billion, near the upper end of the earlier provided guidance of $7.60-$7.75 billion. This indicates 2.5% estimated growth from the year-ago reported figure (earlier expectation was 1%-3% growth). The current Zacks Consensus Estimate for revenues of $7.71 billion falls below the company’s projected range.

Operating cash flow for 2019 is expected at around $1.3 billion (unchanged). The estimated range for capital expenditure is maintained at $350-$400 million.

Our Take

Quest Diagnostics reported a strong third quarter with both earnings and revenues beating the respective Zacks Consensus Estimate. We are upbeat about the company’s expanded network access, which helped the company accelerate volume growth in the third quarter. This solid volume expansion combined with its strategy to attain operational excellence has aided the company to counter significant reimbursement pressure. The updated 2019 outlook buoys optimism indicating that this bullish trend will continue through the rest of the year.

However, declining revenue per requisition was disappointing.

Zacks Rank & Key Picks

Quest Diagnostics currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader medical space are McKesson Corporation MCK, Medtronic MDT and Varian Medical Systems VAR. While Varian Medical sports a Zacks Rank #1 (Strong Buy), McKesson and Medtronic carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for McKesson’s second-quarter fiscal 2020 revenues is pegged at $54.94 billion, suggesting 3.5% growth from the prior-year reported figure. The same for adjusted EPS stands at $3.59.

The Zacks Consensus Estimate for Varian’s fourth-quarter fiscal 2019 revenues is pegged at $853.3 million, suggesting an increase of 6.4% from the year-earlier number.  The same for adjusted EPS is pegged at $1.21, indicating an increase of 4.3% from the year-ago reported figure.

The Zacks Consensus Estimate for Medtronic’s second-quarter fiscal 2020 revenues is pinned at $7.68 billion, hinting at 2.6% growth from the prior-year reported figure. The same for adjusted EPS stands at $1.28, implying a 4.9% improvement from the year-ago reported number.

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