Another Challenging Quarter for LH

Zacks

Laboratory Corporation of America Holdings (LH) reported net earnings of $120.2 million or $1.26 per share in the fourth quarter of 2012, lower than net earnings of $135.4 million or $1.34 per share in the year-ago quarter. However, after taking into account amortization, restructuring and other special charges, adjusted earnings of $1.54 per share in the reported quarter missed the year-ago mark by 1.3%.

Full year 2012 adjusted earnings per share of $6.82 sailed past the 2011 adjusted earnings per share by 7.1%. However, the fourth quarter and full year adjusted earnings per share were reduced by 9 cents due to inclement weather. The Zacks Consensus Estimate for fourth quarter and full year 2012 was pegged at $1.61 and $6.89, respectively.

Revenues increased 2.9% year over year to $1,405.3 million in the quarter, sailing past the Zacks Consensus Estimate of $1,396 million. The low-volume-growth environment is reflected in a mere 2.8% increase in testing volume (measured by requisitions), while revenue per requisition clambered 0.1%. Adding to LabCorp’s woes, adverse weather reduced volume growth by roughly 1%.

Full year 2012 revenues came in at $5,671.4 million, up 2.3% from the year-ago mark. The annual revenues also surpassed the Zacks Consensus Estimate of $5,660 million. Difficult economic scenario continued to adversely affect LabCorp as testing volume inched up 1.7% and revenue per requisition improved marginally by 0.6% in 2012.

Gross margin declined a significant 190 basis points (bps) to 38.3% in the fourth quarter. Adjusted operating income declined 6.1% year over year to $242.2 million in the reported quarter, resulting in an operating margin of 17.2%, lower by 170 bps from the year-ago quarter. Lower gross margin along with a 3.1% rise in selling, general and administrative expenses led to a drop in operating margin.

LabCorp exited 2012 with cash and short-term investments of $466.8 million compared with $159.3 million at the end of 2011. LabCorp had no borrowings outstanding under the $1.0 billion revolving credit facility. Operating cash flow in the quarter was $254.2 million.

During the quarter, LabCorp repurchased 1.6 million shares for $136 million and was left with $68 million of authorization under the previously approved share repurchase plan. A consistent share buyback program led to a 5.6% decline in the outstanding share count and thereby had a positive effect on earnings per share. The company also authorized a new $1 billion share buyback program.

Outlook

LabCorp issued guidance for 2013. The company envisages revenue growth in the range of 2%-3%. The Zacks Consensus Estimate of $5,758 million reflects annual growth of 1.5%. It forecasts adjusted earnings per share in the band of $6.85 and $7.15 (including an adverse impact of 35 cents due to Medicare payment reductions).

The projection does not take into account the positive impact of any share repurchase activity for 2013. The current Zacks Consensus Estimate of $7.26 remains outside the guidance range.

In addition, guidance for operating cash flow and capital expenditure lies in the range of $870 million to $900 million and $200 million to $220 million, respectively.

Our Take

As expected, Hurricane Sandy negatively impacted the company’s performance in the fourth quarter. However, this was not the only downside. Like its peer Quest Diagnostics (DGX), the overall soft industry trends leading to low volume growth hurt LabCorp’s top-line. Further, margins continue to remain under pressure.

We remain cautious about the company as it witnesses testing volume challenges and utilization weakness. Although the company’s share buyback activity might provide some cushion, we remain watchful of the poor bottom-line guidance for 2013 which implies that industry trends are not expected to improve in the near-term.

Given this backdrop, the stock is currently out of favor as it carries a Zacks Rank #4 (Sell). While we prefer to avoid LabCorp, other medical stocks such as ResMed (RMD) and Smith & Nephew (SNN), which released results earlier this month, carry a Zacks Rank #1 (Strong Buy) and warrant a look.

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Read the Full Research Report on SNN

Read the Full Research Report on RMD

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