Quest Diagnostics followed up its earlier release of disappointing preliminary third-quarter results with more details behind the under performance and pulled back its outlook for the full year. The addition of this information has not materially changed our assumptions and we are holding steady on our $65 fair value estimate.

Despite the new management team’s well-publicized plans to improve Quest’s operations and enhance efficiencies, we have held off on giving the firm much credit for achieving results until we see some tangible evidence that such efforts are having an effect. As a result, our estimates for 2013 have assumed on-going lackluster performance, which is in line with management’s revised outlook.

The notable gap between Quest’s recent results and those of its main rival, LabCorp, over the last few quarters only underscores how strong Quest’s narrow moat is thanks to structural advantages like cost structure and efficient scale. Despite a history of unfocused strategy and spotty operational execution, Quest still enjoys the benefits of a narrow economic moat.

We were not surprised to see that Quest’s quarterly organic volume fell 2%, but the 4.3% fall in pricing did raise our eyebrows. We had been expecting some weakness in pricing thanks to the substantial Medicare cut to anatomic pathology reimbursements, but this effect was exacerbated by rising denials in molecular diagnostic tests.

With the double-whammy of soft volume and pricing, Quest’s adjusted quarterly operating margin fell to 12%, roughly a drop of 460 basis points from the prior-year period. This latest quarter of anemic performance raises serious questions about how much of the disappointment can be laid at the feet of Quest specifically, versus general market conditions. Though management stressed challenging utilization trends in health care, we think the answer may lie closer to home. We will know with more certainty after LabCorp releases quarterly earnings tomorrow.