LabCorp Misses, Narrows Guidance

Zacks

Laboratory Corporation of America Holdings (LH) reported earnings per share (“EPS”) of $1.56 in the second quarter of fiscal 2012 compared with $1.20 in the year-ago quarter. Restructuring charge aside, the company recorded expenses related to acquisitions and loss on the disposal of one of its European subsidiaries and one of its joint ventures.  

Adjusted EPS came in at $1.77 (excluding amortization, restructuring and other special charges), a penny behind the Zacks Consensus Estimate. Earnings, however, surpassed the previous year's adjusted EPS of $1.64.

Revenues increased 1.4% year over year to $1,423.4 million, marginally missing the Zacks Consensus Estimate of $1,440 million. The low-volume-growth environment is reflected in flat testing volume (measured by requisitions) while revenue per requisition increased 1.5%. LabCorp’s peer, Quest Diagnostics (DGX), is also experiencing the brunt of economic challenges with just-released second-quarter testing volume rising a meager 0.7% and revenue per requisition remaining flat.

Gross margin during the quarter declined 120 basis points (bps) to 40.7%. Adjusted operating income remained almost flat at $280.3 million in the reported quarter, resulting in an operating margin of 19.7%. Lackluster growth compelled LabCorp to keep its expenses under control. Consequently, the company recorded a 13.4% drop in selling, general and administrative expenses.

LabCorp exited the quarter with cash and short-term investments of $124.4 million compared with $159.3 million at the end of December 2011. At quarter end LabCorp had $450.0 million of borrowings outstanding under the $1.0 billion revolving credit facility. Operating cash flow for the quarter was $186.3 million.

The company has been using its cash to make strategic acquisitions as well as reward its shareholders through share repurchases. LabCorp recently received clearance from Federal Trade Commission with respect to its pending acquisition of Medtox Scientific (:MTOX). This deal should strengthen the company’s foothold in the field of toxicology.

During the quarter, LabCorp repurchased 1.5 million shares for $130.3 million and was left with $331.9 million of authorization under the previously approved share repurchase plan. A consistent share buyback program by the company led to a 4.7% decline in the outstanding share count, thereby having a positive effect on the bottom line.

Outlook

LabCorp narrowed its guidance for fiscal 2012. The company expects 2−3% revenue growth (previous guidance of 2−3.5%) resulting in adjusted EPS of $6.80−$7.00 ($6.75−$7.05) in the said fiscal. In addition, guidance for operating cash flow and capital expenditure remained unchanged at $950 million and $155 million, respectively.In addition, the company expects Genzyme Genetics to be slightly accretive to 2012 earnings.

Recommendation

We were expecting a subdued quarter from LabCorp as the adverse macro situation has dealt a blow to industry volumes at large, a function of reduced physician office visits. We remain concerned about pricing going ahead, which might be affected by contract renewals amidst a tough competitive and economic scenario. We nonetheless appreciate the company’s focus on expense management and other strategic initiatives to spur growth.

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.

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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