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4 Leading Analysts Put Quest and LabCorp Stock, Guidance, and Strategy Under the Microscope

Aug 5, 2008
Stock analysts have shown increased interest in Quest Diagnostics (DGX) and Laboratory Corporation of America (LabCorp) (LH) recently because of their aggressive acquisition activity and managed care contracting efforts. To help put the various views into perspective, Washington G-2 Reports has analyzed and compared the recent stock buy/sell opinions and drivers behind each firm from the analysts at Cowen and Company, PiperJaffray & Co., Goldman Sachs, and StockScouter, part of Money Central/MSN, affiliated with Zachs Investment Research.

Overall, for Quest, three of the four analysts gave the stock either a neutral rating or indicated that Quest's stock will perform at the expected market level. Goldman Sachs was slightly less optimistic with a sell rating.

Analysts for LabCorp, on the other hand, were more evenly split. Cowen and Company felt LabCorp stocks would outperform the market, and StockScouter suggested a moderate buy. PiperJaffray and Goldman Sachs were neutral, suggesting that LabCorp stocks would perform at the expected market level.

Analyst Quest Diagnostics LabCorp

-Cowen and CompanyNeutral Outperform
-PiperJaffrayNeutral Neutral
-Goldman SachsSell Neutral
-StockScouterHold Moderate buy

QUEST DIAGNOSTICS

Cowen and Company Evaluation

There are four overarching concerns facing Quest Diagnostics, according to Cowen and Company. As stated by Kemp Dolliver, CFA and David Larsen of Cowen and Company, they are:

1. Cost-reduction program;
2. Ameripath integration;
3. Cross-selling; and
4. 2008 guidance.

PiperJaffray Evaluation

PiperJaffray notes that Quest's announced 2007 annual revenues were $1,770 million, above its own prediction of $1,739 million and Wall Street's prediction of $1,849 million. Although Quest lost about 5.1% of its test volume due to the United Healthcare contract losses, management indicates it has retained more than 20% of its volumes, which are consistent with its 2007 Q3 levels. Overall, interest expenses were lower than predicted ($53.9 million versus an expected $59.9 million). "Slightly lower-than-expected gross margin was offset by better-than-expected interest expenses and SG&A leverage." GAAP EPS was $0.04 higher ($0.79) than its original estimate of $0.75 and Wall Street's $0.78.

Goldman Sachs Evaluation

Goldman Sachs initiated analysis on Quest Diagnostics and LabCorp in November 2007. Its evaluation of Quest Diagnostics shows concern about the aggressive cost-cutting Quest has made in response to the loss of the United Healthcare business, as well as the AmeriPath acquisition. It notes that managed-care contracts have threatened to push prices down, an additional incentive for cost-cutting.

Goldman Sachs Rating: Sell

StockScouter Rating

MSN StockScouter program rates stocks on a scale of 1 to 10 based on an evaluation of four characteristics:

1. Fundamental;
2. Ownership;
3. Valuation; and
4. Technical.

In the most recent evaluation of Quest Diagnostics, the overall rating was a 7, with 1 being the worst and 10 being the best. The summary evaluation was that Quest Diagnostics stock was expected to "outperform the market over the next six months with very low risk."

Fundamental grade: C
Ownership grade: C
Valuation grade: D
Technical grade: D

As a result, the Zacks average brokerage recommendation was a hold.

LABORATORY CORPORATION OF AMERICA (LABCORP)

Cowen and Company Evaluation

Cowen and Company notes four areas that are significant factors on LabCorp's stocks. They are:

1. United Healthcare's contract negotiations;
2. New York City area service gains;
3. Realistic expectations; and
4. Stabilized pricing environment.

PiperJaffray Evaluation

LabCorp's 2007 revenue and EPS were above both PiperJaffray and Wall Street's expectations. LabCorp reported an 11.9% top-line growth, 5% of which came from new contracts with United Healthcare. PiperJaffray predicted revenues at $993.8 million, Wall Street at $992.6 million, but LabCorp reported $1,005.8 million. Price and volume increased by 0.9% and 11.0%, respectively, above PiperJaffray's estimates of -0.2% and 10.9%, respectively.

Goldman Sachs Evaluation

Goldman Sachs initiated analysis on Quest Diagnostics and LabCorp in November 2007. It notes that LabCorp's low leverage position will allow further consolidation. However, it also notes that LabCorp initiated an expanded share repurchase authorization in November 2007, which indicates mergers and acquisitions (M&A) may not be attractive to the company.

Goldman Sachs Rating: Neutral

StockScouter Rating

MSN StockScouter program rates stocks on a scale of 1 to 10 based on an evaluation of four characteristics:

1. Fundamental;
2. Ownership;
3. Valuation; and
4. Technical.

It further provides numerical values utilizing analyst recommendations (provided by Zacks Investment Research).

In the most recent evaluation of LabCorp, the overall rating was a 9, with 1 being the worst and 10 being the best. The summary evaluation was that LabCorp stock was expected to "significantly outperform the market over the next six months with less than average risk."

Fundamental grade: C
Ownership grade: C
Valuation grade: A
Technical grade: A

As a result, the Zacks average brokerage recommendation was a moderate buy.
About the Author
Mark Terry is a staff writer for Washington G2 Reports and author of Lab Industry Strategic Outlook: Market Trends & Analysis 2007 and several other Washington G2 Reports publications. Learn more about Washington G2 Reports.
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