A Quest for Improvement
By Brian Orelli
February 25, 2008
Recommended (3)
Quest Diagnostics (NYSE: DGX) made the best of a bad situation last year when it lost its contract with insurer UnitedHealth (NYSE: UNH) to rival Laboratory Corp. of America (NYSE: LH), but investors seem to be looking past the recent earning release; shares of the diagnostic test company are off 9% since the earnings were released late last week.
In the fourth quarter of last year, income from continuing operations was actually up 2% year over year, thanks to Quest's acquisition of AmeriPath and a new agreement with Aetna (NYSE: AET). What really seems to have disappointed investors is the company's outlook for this year. Quest is looking for earnings per diluted share of between $3.00 and $3.20, before any charges. That could be as little as a 6% jump compared with the $2.84 per share it earned on continuing operations last year.
Quest's other problem is the uncertainty surrounding the government investigation into its former test manufacturing unit, NID. The company is hoping to reach a settlement, and it increased its reserves to be used for legal fees and a possible settlement by $190 million. Still, Quest said it's "fully prepared to litigate this matter" if it can't reach a compromise with the government.
Longer-term, things look better for the Inside Value pick. If it can move its operating margin from the 17% expected this year toward its long-term goal of 20%, Quest should make out pretty well in the health-care diagnostics duopoly. The population isn't getting any younger, you know.
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