Quest Diagnostics came out with its fourth quarter earnings yesterday, and the news was not good. Its net income dropped 71% to $0.34 per share as compared to the year before. Revenue fell 4% to $1.77 billion; analysts were expecting $1.82 billion in revenue. Forward guidance for 2013 is basically flat, with only a 0-1% estimated gain in revenue. Investors did not take the news well and Quest stock closed at $58.41, a decline of 5.53%
Quest attributes this drop to the combined effects of Superstorm Sandy and the sale of two of its businesses. Quest sold its OralDNA Labs to Access Genetics in December 2012 (and took a loss) and recently announced it would be selling Hemocue diagnostic products. Both moves are in line with Quest’s stated desire to focus on diagnostic information services.
Quest acknowledged cuts to pathology reimbursement will also hurt its bottom line. The recent 33% cut in global reimbursement for CPT 88305, along with other decreases, will cut its revenue by an estimated 3% in 2013. It also expects a 1-2% yearly decrease in reimbursement until 2015.
This forecast provides a helpful look at what the business of pathology will look like for the next few years, and it is not at all uplifting.
In related news, LabCorp’s 4th quarter earnings are due out Friday, February 8 before the opening bell.
Source: Dismal 4Q for Quest Diagnostics – Zacks.com
Leading diagnostic testing company, Quest Diagnostics (DGX – Analyst Report) reported earnings per share (“EPS”) from continuing operations of 87 cents in the fourth quarter of 2012, down considerably from $1.16 in the year-ago period. However, after taking into account certain charges related to restructuring and integration (14 cents), adjusted EPS from continuing operations came in at $1.01, down 15.8% year over year. This does not exclude the impact of Hurricane Sandy that reduced the EPS by 6 cents.
The Zacks Consensus Estimate for the quarter’s EPS was $1.06. The year-ago quarter had incurred a cost of 2 cents per share each, related to restructuring and integration as well as CEO succession costs. For the full year, adjusted EPS from continuing operations was $4.36, down 2 cents from the year-ago adjusted figure and remained below the Zacks Consensus Estimate of $4.49.
Revenues from continuing operations for the fourth quarter were down 4.0% year over year to $1.77 billion, missing the Zacks Consensus Estimate of $1.82 billion. As announced earlier, the impact of Hurricane Sandy reduced the quarter’s revenues by an expected $21 million. Sales for fiscal 2012 remained at $7.4 billion, flat year over year as well as in line with the Zacks Consensus Estimate.
We believe that the overall soft industry trends leading to low volume growth was a dampener for the company. We expect this challenging scenario to adversely affect Quest Diagnostics’ peer Laboratory Corporation of America Holdings (LH – Analyst Report) as well, which is scheduled to release its fourth-quarter and fiscal 2012 results on Feb 8, 2013.
Notably, earlier in Dec 2012, Quest Diagnostics sold its OralDNA Labs salivary-diagnostics business to Access Genetics and recently announced the plan to divest its HemoCue diagnostic products business. Accordingly, revenues from these two businesses are reported as discontinued operations in its fourth-quarter and fiscal 2012 results. The company believes that these divestitures will allow it to refocus its resources toward core diagnostic information services.
Among operating costs, cost of services during the reported quarter stood at $1.07 billion, flat year over year. Selling, general and administrative (SG&A) expenses dropped 4.5% to $421 million. Other operating income was $3.3 million, compared to expense of $0.2 million in the year-ago quarter. Adjusted operating margin in the quarter contracted 232 basis points (bps) to 15.98% on adjusted operating income of $283.5 million.
Quest Diagnostics exited the quarter with $295.6 million in cash and cash equivalents, up from $164.9 million at the end of fiscal 2011. Cash provided by operating activities for the quarter was $380 million compared with $338 million in year-ago quarter. The company is focused on enhancing shareholders’ value and improving returns on capital. During the reported quarter, Quest Diagnostics repurchased shares worth $50 million and reduced outstanding debt by $147 million.
Outlook
Quest Diagnostics provided its fiscal 2013 outlook. The company expects revenue growth to remain in the band of 0%–1%. The current Zacks Consensus Estimate of $7.5 billion (representing annual growth of 1.4%) remains outside the guided range. EPS is expected to remain in the range of $4.35−$4.55. The Zacks Consensus Estimate of $4.49 falls within the range. Moreover, the company expects $250 million of capital expenditure and $1.0 billion as cash provided by operations.
Recommendation
We remain cautious about the company as it is continuously witnessing challenges with testing volume. Concerns also linger about the soft industry trends due to a decline in physician office visits, flat pricing and low organic revenue. Moreover, a disappointing fiscal 2013 guidance reflected the fact that the industry trend will not improve in the near future, which adds to our concerns.
However, we are optimistic regarding the company’s strategy to refocus on Diagnostic Information Services along with the organizational structure developed by the company’s new CEO, Steve Rusckowski. We also expect this to run successfully adding synergies to its ongoing $500 million restructuring initiative, associated with its Invigorate program. The stock retains a Zacks Rank #3 (Hold).
Other Stocks to Consider
While we prefer to remain on the sidelines on Quest Diagnostics, other medical device stocks worth a look are Cyberonics Inc. (CYBX – Analyst Report) and Haemonetics Corporation (HAE – Analyst Report). Both the stocks carry a Zacks Rank #1 (Strong Buy).
what about their dermpath diagnostics division? arent they giving up labs there? arent they losing one lab worth 28M and they paid alot for that purchase. wasnt that over a 1.5B with 700M debt. isnt that a company that bills 88305 95% of the time and does alot of slide prep work. whats going to happen now? are they going to sell off that division? they paid alot for that division. wow thats a disaster for them. 3% loss in profit that seems a bit low with a 33% cut in a major fee code. is that all? and the year hasnt even started. how ever did a megalab like that get so huge? maybe they should just give up on anatomic pathology altogether. the handwriting is on the wall. what is happening with that lawsuit mentioned on this website in north california where four labs are suing quest alleging monopolistic and conspiratory practices with the big insurances companies? is there any way that can become a class action lawsuit?
They paid $1.23 billion cash and assumed $770 million in debt. Not sure who they would sell it to. If it’s worth too little to a massive company like Quest, then I doubt they will be able to find a buyer at an attractive price.
You are not the first person to say that anatomic pathology may not be worth it to the Quest’s and the LabCorp’s of the world now after the fee cuts. It will be interesting to see what happens.
With respect to the case you are referring to in California (Rheumatology Diagnostics Laboratory et al. vs. Blue Shield of California et al), a “Certificate of Interested PArties” was filed yesterday, but no major movement since my post.
you know what quest needs to just stop the fee splitting in their dermpath diagnostics division. just have a national policy to stop direct billing clinicians for their slide preparations and whatever they are doing. that would help their bottom line. they really need to look at their compliance policies very carefully. wall street and senate subcommittees should be looking as well. what did senator grassly and baucus find out about the pull through scheme. i would like to know.
I have not heard anything more about the Senate investigation. If you hear anything, please let me know.
its amazing how nothing more has been heard about the pull throughs and the senate. guess it was just grandstanding on the part of the senators.
It’s possible it was all a show, but things can move very slowly in the Senate, and plus, I imagine attention was more focused on the election.
It can’t be overstated with how the trend of hospitals buying physician practices is killing the reference labs. Its funny watching the smaller reference labs sell out to labcorp/quest. I have no clue why they keep buying them for millions of dollars. You can almost picture the owners riding off into the sunset with a bag of money carried over their back like a cartoon. Those small labs are already distressed and heading toward going out of business. I guess labcorp/quest are buying the few remaining accessions and trying to kill off a remaining competitor. Hospitals are seducing physicians by forcing higher reimbursement from payers for the offices. We are headed toward hospital monopolies now. Meet the new boss, same as the old boss. But I do hope the hospitals dont sell their labs to quest/labcorp. Let them go away.
It is my understanding the only way the large reference labs can grow is to acquire pre-existing labs. Now with the fee cuts for 88305s that have made them 66% less valuable, they have a lot to make up for. So it’s a race to see who can buy these labs first.
When you talk about hospitals selling their labs to Quest/LabCorp, I presume you are referring to some of the recent talk about hospitals outsourcing their labs, right?
Kind of a scary proposition to me.
Yes, see UMASS as an example. The hospital monopolies that are coming may end up being no better but I really hate the large corporate labs with a passion.
I watched one national lab buy 3 small independent labs in the area, merge/gut them into one entity and lose a decent amount of the remaining business. It ended up helping us gain some work so Im glad it happened.
In my last comment, I should have said the cuts to 88305s have made them 33% less valuable. My apologies.
Did the national lab lose a decent amount of business because of poor customer service?
It’s always customer service. They dont seem to understand that after the same scenario playing out over and over again. Once the lab gets bought, they gut the place laying off way too much staff. The AP section is usually outsourced to another facility they have so turnaround times suffer. It does provide an opportunity to get some business when another local lab finally throws the towel in and sells. At least it has for us.
Or for the people who sold to simply wait out their non-competes and get the business back.
Exactly. If they have relationships with the physicians, they can get the business back easy when they start a new venture.