Earnings Preview: LabCorp

Zacks

Laboratory Corporation of America Holdings (LH) is scheduled to release its second quarter fiscal 2012 earnings on Thursday, July 19, 2012, before the market opens. The company is expected to report earnings per share (EPS) of $1.78 on revenue of $1.44 billion for the quarter, according to the Zacks Consensus Estimates.

Prior-Quarter Highlights

LabCorp reported EPS of $1.63 in the first quarter of fiscal 2012 compared with $1.23 in the year-ago quarter. Adjusted EPS came in at $1.74 (excluding amortization, restructuring and other special charges), sailing past the Zacks Consensus Estimate of $1.68 and the previous year's adjusted EPS of $1.52.

Revenues increased 4% year over year to $1,423.3 million, ahead of the Zacks Consensus Estimate of $1,404 million. Testing volume (measured by requisitions) and revenue per requisition increased 2.8% and 1.2%, respectively. A comparatively milder weather in the current year benefited LabCorp's revenue and volume growth rate by 1.5%.

LabCorp reiterated its guidance for fiscal 2012. The company expects 2%-3.5% revenue growth resulting in adjusted EPS of $6.75-$7.05 in the said fiscal. In addition, operating cash flow and capital expenditure are expected to be $950 million and $155 million, respectively.

Agreement of Analysts

Estimates for the second quarter have witnessed minor changes in the past 7 and 30 days. While one analyst has raised his/her estimate over the past week without any downward revision, the last 30 days witnessed revisions in both directions by one analyst each. For the current fiscal, 2 out of 17 analysts covering the stock have lowered their estimates in the last 30 days.

Pricing has remained intensely competitive in the industry. Besides, the adverse macro situation has dealt a blow to industry volumes resulting from reduced physician office visits.

As for LabCorp, despite the sustained softness in this market for the past couple of quarters, analysts haven't revised their estimates much, indicating a more or less in line quarter. With respect to contract extensions, renewal with Humana (HUM) is expected to come up at the end of 2012. The company might provide some color on contract renewals during the call.

Meanwhile, LabCorp has been following the acquisition route which should further drive its top line. The main beneficiary from added businesses would be the esoteric testing unit. Currently, the company is in the process of acquiring Medtox Scientific (:MTOX), a provider of high quality specialized laboratory testing services and on-site/point-of-collection testing devices. We expect LabCorp to share some details regarding the business prospects from this deal.

Magnitude of Estimate Revisions

Given the dearth of estimate revisions, the consensus estimate for the current quarter has remained static at $1.78 over the last 30 days. However, the estimate for fiscal 2012 has gone down by 4 cents to $7.00 in the last month.

Surprise

Going by past trends, we expect LabCorp to exceed estimates. The company exceeded estimates consistently in the past four quarters with a positive four-quarter average of 2.01%. This means that on an average, LabCorp has topped the Zacks Consensus Estimate by this magnitude over the last four quarters.

Recommendation

In an effort to spur growth and profitability, LabCorp continues to focus on strategic initiatives. It includes introduction of innovative tests in the genomic/esoteric arena, specifically in the area of cancer; greater focus on managed care organizations in addition to aggressive penetration into the hospital market. The company is focusing more on the high-margin esoteric testing business, which is expected to contribute 45% of total sales in the next 3-5 years. LabCorp is also paying due attention to IT initiatives to improve physician and patient experience. However, challenges remain in the form of suppressed volume and healthcare utilization trends. Moreover, some of the large contracts that are coming up for renewal in the near future might have an adverse impact on pricing. LabCorp's competitor Quest Diagnostics (DGX) is also reporting its second quarter earnings tomorrow.

We currently have a Neutral recommendation on LabCorp over the long term. The stock retains a Zacks #3 Rank (Hold) in the short term.

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