Quest Diagnostics (DGX) Q1 Earnings Top Mark, Margins Down

Quest Diagnostics Incorporated’s DGX first-quarter 2019 adjusted earnings per share (EPS) of $1.40 exceeded the Zacks Consensus Estimate by 2.9%. However, adjusted earnings declined 7.9% from the year-ago number.

Reported EPS came in at $1.20, down 5.5% from the year-ago quarter.

Reported revenues in the first quarter inched up 0.4% year over year to $1.89 billion and also edged past the Zacks Consensus Estimate by 0.5%.

Quarterly Details

Volumes (measured by the number of requisitions) expanded 3.6% year over year in the first quarter (up 2.4% organically). However, revenue per requisition dipped 3%. Diagnostic information services revenues in the quarter were up 0.5% on a year-over-year basis to $1.81 billion.

Cost of services during the reported quarter was $1.24 billion, up 1.5% year over year. Gross margin came in at 34.2%, reflecting a 71-basis point (bps) contraction year over year.

Selling, general and administrative expenses increased 5.8% to $384 million in the quarter under review. Yet, adjusted operating margin showed a decline of 122 bps to 14.4%.

Quest Diagnostics exited the quarter with cash and cash equivalents of $464 million compared with $135 million at the end of 2018. Net cash provided by operating activities was $275 million in the first quarter compared with $180 million a year ago.

In the first quarter, the company repurchased 0.6 million shares of the common stock for $50 million. As of Mar 31, 2019, Quest Diagnostics was left with $0.5 billion of authorization under the approved share buyback plan.

Guidance Intact

Quest Diagnostics has reiterated its 2019 outlook. Excluding the impact of amortization expense, adjusted EPS for the full year is projected to be more than $6.40. The Zacks Consensus Estimate for the metric is pegged at $6.44.

Revenues for 2019 are still estimated in the band of $7.60-$7.75 billion (indicative of roughly 1-3% annualized growth). The current Zacks Consensus Estimate for revenues of $7.69 billion falls within the company’s projected range.

Operating cash flow for 2019 is expected at around $1.3 billion. The current estimate for capital expenditure sticks to the forecast bracket of $350-$400 million.

Our Take

Quest Diagnostics exited first-quarter 2019 with better-than-expected earnings as well as revenues. However, the very nominal year-over-year increase in Diagnostic information service revenues was disappointing.

In the last couple of years, Quest Diagnostics faced several reimbursement issues, which hurt its revenues.

The company is presently refocusing on its core diagnostic information services business and working on a disciplined approach toward capital deployment. Per Quest Diagnostics, its 2019 view reflects significant reimbursement pressure, offset by strong volume growth and a steady execution of the Invigorate program.

Zacks Rank & Key Picks

Quest Diagnostics currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader medical space are Bio-Rad Laboratories, Inc. BIO, ICU Medical Inc. ICUI and DexCom, Inc. DXCM.

Bio-Rad is scheduled to release first-quarter 2019 results on May 8. The Zacks Consensus Estimate for the quarterly adjusted EPS is pegged at $1.12 and for revenues, stands at $548.8 million. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ICU Medical is scheduled to release first-quarter 2019 results on May 9. The Zacks Consensus Estimate for the period’s adjusted EPS is $2.18 and for revenues, $321.1 million. The stock carries a Zacks Rank #2 (Buy).

DexCom is slated to release first-quarter 2019 results on May 1. The Zacks Consensus Estimate for the quarterly adjusted loss per share stands at 17 cents and for the top line, $246.5 million. The stock has a Zacks Rank of 2.

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