This laboratory operator is scheduled to report earnings on July 27. EPS estimates currently stand at $2.29 per share.
Laboratory Corp. of America (LH)
From Dow Theory Forecasts
Laboratory Corp. of America (LH), one of just two national laboratory operators, benefits from pricing power and the current environment of rising medical utilization. Although hospitals still conduct about half of clinical lab work in the U.S., they increasingly outsource testing to companies like LabCorp.
The U.S. accounts for 82% of revenue and Canada 5%, limiting LabCorp’s exposure to the uncertainty gripping Europe after the U.K. voted to leave the European Union.
The stock has risen 5% this year, well above the S&P 500’s 1% gain, yet still looks attractively priced, earning a Quadrix® Value score of 66. LabCorp, scoring above 75 for both sector-specific ranks, is a Buy and a Long-Term Buy.
Over the years, LabCorp has aggressively snapped up smaller labs to push its share of the U.S. lab market to 11%. I t took a new direction in February 2015, paying $6.15 billion to acquire Covance, a contract research organization (CRO) that tests drugs for pharmaceutical companies. LabCorp’s traditional diagnostics unit now represents about 73% of revenue, with the remaining 27% coming from drug-development services. The deal came at a time when demand for new drug development was strong an d LabCorp’s core diagnostics business faced pressure from lower reimbursement rates. Covance reduced LabCorp’s exposure to managed-care providers, Medicaid, and Medicare. LabCorp can also tap its database of 75 million patients to recruit subjects for clinical trials.
The merger is already paying off. March-quarter sales jumped 30%, from a combination of LabCorp’s core testing business (6%) and Covance (24%). Testing volumes rose 4%, with slightly higher pricing. Both cash from operations and free cash flow more than doubled in the 12 months ended March and currently stand at all-time highs. LabCorp plans to use excess cash to pay down the $6.39 billion in debt on its balance sheet. It also expects to resume share repurchases in the second half of the year.
Earlier this year, rumors swirled that LabCorp held preliminary talks to purchase INC Research Holdings (INCR), a CRO with a stock market value of $2 billion. Management says it currently has no intention of making another big acquisition, though the pipeline for smaller deals is likely robust, given competitive challenges facing smaller labs.
Citing improvement at its core lab business and strength from Covance, LabCorp raised its 2016 guidance in April. Management now expects earnings per share to increase 8% to 13% on revenue growth of 8.5% to 10.5%. At 16 times trailing earnings, the stock trades in line with its five-year average but well below the median P/E of 21 for S&P 1500 health-services stocks. If LabCorp earns $8.55 per share this year, the bottom of its projected profit range, and its trailing
P/E ratio rises to 18, the shares will advance to $154 by early 2017.
Richard J. Moroney, CFA, Dow Theory Forecasts, www.dowtheory.com, 800-233- 5922, July 4, 2016