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Why Is Quest Diagnostics (DGX) Down 7.7% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Quest Diagnostics (DGX). Shares have lost about 7.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Quest Diagnostics due for a breakout? 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 Earnings Beat, Volume Down in Q2

Quest Diagnostics’ DGX second-quarter 2020 adjusted earnings per share of $1.42 beat the Zacks Consensus Estimate by a penny. Adjusted earnings however declined 17.9% from the year-ago number.

Certain one-time expenses, like the ones related to the COVID-19 pandemic and their resultant impact including certain income recognized under the Coronavirus Aid, Relief, and Economic Security Act, partially offset by expense associated with a one-time payment to eligible employees to help offset their COVID-19 related expenses; certain asset impairment charges and incremental costs incurred primarily to protect the health and safety of the company's employees and customers, were excluded from the quarter’s adjusted figures.

GAAP earnings from continuing operations came in at $1.36 per share, marking a 34.9% decline from the year-ago quarter.

Reported revenues in the second quarter declined 6.4% year over year to $1.83 billion. The same however beat the consensus estimate by 0.16%.

Quarterly Details

Volumes (measured by the number of requisitions) declined 17.7% year over year in the second quarter (down 18.2% organically). Revenue per requisition however improved 15.3% year over year.

Diagnostic information services revenues in the quarter were down 5.7% on a year-over-year basis to $1.76 billion.

Margins

Cost of services during the reported quarter was $1.22 billion, down 3.5% year over year. Gross margin was 30.8%, reflecting contraction of 445 basis points (bps) from the year-ago figure.

Adjusted operating margin of 10.4% represented a 632-bps contraction year over year. Selling, general and administrative expenses declined 0.6% to $360 million in the quarter under review.

Cash, Capital Structure and Solvency

Quest Diagnostics exited the second quarter of 2020 with cash and cash equivalents of $988 million compared with $342 million at the end of the first quarter. Cumulative net cash provided by operating activities through the second quarter was $602 million compared with $596 million in the year-ago reported quarter.

For the three months ended Mar 31, 2020, the company did not repurchase any shares of its common stock.  At the end of the second quarter, $1.2 billion remained available under the company's existing share repurchase authorizations. However, Quest Diagnostics has temporarily suspended additional share repurchases under the existing authorization through the end of 2020.

However, the company's board of directors remains committed to its quarterly dividend.

2020 Guidance Reinstated

Given the rapidly-changing uncertainties and likely outcomes of coronavirus, Quest Diagnostics had withdrawn its full-year guidance. This time however the company provided its 2020 projection. It reflects a number of assumptions that are subject to change based on uncertainties related to the impact of the COVID-19 pandemic.

Going by the latest guidance, the company expects to report full-year net revenues in the range of $8 billion to $8.6 billion (an expected 3.5% to 11.3% growth from the year-ago reported revenue growth rate). Full-year adjusted EPS is projected in the range of $6.60 to $8.60.

The current Zacks Consensus Estimate for full-year adjusted earnings is pegged at $8.04 while the same for revenues stands at $8.50 billion.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 53.45% due to these changes.

VGM Scores

At this time, Quest Diagnostics has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, 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 trending upward for the stock, and the magnitude of these revisions looks promising. 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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