Quest Diagnostics Provides Updated Estimates for Solstas

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On Monday, Quest Diagnostics completed its acquisition of Solstas Lab Partners and updated its original 2014 guidance to include Solstas; we had already included Solstas in our estimates. The company also indicated that weather should affect first-quarter adjusted EPS by $0.10, above our estimate of $0.05, which we lowered on February 26. Full-year revenue growth is now expected to be 2% to 4%, versus the prior flat to 2% (on its recent quarterly conference call, management suggested that revenue growth with Solstas would be 1% to 4%). Adjusted EPS are expected to be between $3.95 and $4.15, versus previous guidance of between $3.90 and $4.10.

We assume that a greater-than-expected benefit from Solstas (closer to 4% revenue growth and a $0.15 EPS benefit—$0.05 incremental guidance increase after accounting for -$0.10 for weather in February—is driven by the early close of Solstas. This suggests that the underlying business is doing better than expected given that February weather was not included in original guidance, but perhaps coming online at a lower margin (drugs of abuses testing perhaps?).

We are lowering our first-quarter adjusted EPS estimate by an additional $0.03, to $0.90, and increasing our full-year revenue growth projection to 2.0%, from 1.7%, given the sooner-than-expected close of Solstas (our full-year EPS estimate is unchanged at $4.06). We increased the impact from bad weather in the first quarter to include an additional $0.03 (we had already lowered it by $0.05).

Quest is trading at 12.9 times projected next-12-months’ earnings, above its threeand five-year averages of 12.6 and 12.7 times, respectively. We continue to believe that a tough operating environment for labs will lead to further industry consolidation by Quest and LabCorp (LH $95.32; Market Perform), although we remain cautious about reimbursement headwinds and uncertainty regarding 2015 cuts (especially the Clinical Laboratory Fee Schedule). We therefore maintain our Market Perform rating on Quest.

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