Quest’s Latest Earnings Report Suggests Growth Is Gaining Momentum

Quest Diagnostics seems to have snapped out of it. The New Jersey-based laboratory giant posted a significant gain in both net income and revenue for the fourth quarter of 2014 and forecasts modest growth for 2015—the third consecutive quarter of gains. For the quarter ending Dec. 31, Quest reported net income of $200 million, or $1.08 per share, on revenue of $1.9 billion. That compares to the fourth quarter of 2013, when Quest’s net income was $151 million on revenue of $1.8 billion. That represents increases of 32 percent and 7.2 percent, respectively, for the latest quarter. The fourth quarter numbers beat the expectations of several analysts, which had forecast earnings of about $1.05 a share and revenue in the range of $1.84 billion. Quest had gone nearly two years without reporting an increase in revenue, until it finally broke that trend with its second quarter of 2014 numbers reported last July. Quest also issued a full-year forecast of earnings in the range of $4.70 to $4.85 per share—up nearly 10 percent from the analyst consensus of $4.41 per share. It projected revenue would grow this year by 2 to 3 percent, slightly higher than the consensus of 2 percent. "We ended 2014 strong, and in the fourth quarter generated growth in revenues and EPS," said Steve Rusckowski, Quest’s chief executive officer. “The 2015 outlook we are providing today is based on our expectations for strengthening operational performance and an improving business environment.” For the full 2014 calendar year, Quest reported net income of $592 million, down from $883 million for calendar 2013, although that was padded with an approximately $300 million profit from the company’s sale of royalty rights of the anti-cancer drug ibrutinib. In a conference call with analysts, Rusckowski said that there was a modest increase in test utilization, and that the benefits from the rollout of the Affordable Care Act were quickly accruing. “We are encouraged by the progress on exchange enrollment as the result of the ACA,” he said. According to data recently released by the U.S. Department of Health and Human Services, up to 9.9 million Americans are expected to be enrolled or re-enrolled in health plans through the state and federal health insurance exchanges. In the 28 states that have expanded Medicaid eligibility guidelines, enrollment is expected to jump 18 percent. The 22 states that have not opted into the program are still expected to see enrollment grow by 5.2 percent, according to data from the Kaiser Family Foundation. Rusckowski also said that there is expected to be less pressure from government payers to make cuts to the clinical lab fee schedule in 2015. Zacks Equity Research was fairly optimistic about Quest’s prospects moving forward, noting that the company has been investing more resources into higher-end esoteric testing and that it is reaping a strong return from its diagnostic information services, which saw revenue grow by more than 7 percent in the fourth quarter. “Although the recent volume improvement benefited the company’s top line in the reported quarter, organic volume is still sluggish,” Zacks noted in a recent report. “Moreover, lower health care utilization still acts as a major deterrent. Although the company has seen signs of modest increase in utilization, sustainability is still a matter of question.” However, Quest’s stock price has risen more than 10 percent since the middle of December. And the company recently increased its quarterly dividend by 15 percent, to 38 cents a share. Takeaway: Quest Diagnostics appears to have broken out of its lengthy growth slump.