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What's in the Cards for LabCorp (LH) This Earnings Season?

Zacks Equity Research

Laboratory Corporation of America Holdings LH, also known as LabCorp, is slated to report third-quarter 2017 results, before market opens on Oct 25. Last quarter, the company delivered a positive earnings surprise of 3.8%. It has an average earnings beat of 1.1% for three of the trailing four quarters. Let's see how things are shaping up for this announcement.

Factors at Play

LabCorp’s top-line performance continues to be affected by softness in its Covance Drug Development business, as was the case in the last reported quarter as well. The weak performance was led by sluggish early development and central lab businesses, which were affected by a slower revenue conversion from backlog and cancellation by sponsors of two large clinical studies in 2016. Also, adverse foreign exchange rates affected the numbers to the tune of 140 basis points (bps) at this segment.

Meanwhile, we are upbeat about the company’s expectations of an improvement in the Covance Drug Development arm starting the second half of 2017. This should get reflected in the third-quarter performance.

Over the last two years, LabCorp has faced several reimbursement issues that have dented its revenues. The company is concerned about the CMS (Centers for Medicare & Medicaid Services) proposal related to Protecting Access to Medicare Act (PAMA). We believe reimbursement pressure will affect the company’s performance in the soon-to-be-reported quarter as well.

Laboratory Corporation of America Holdings Price and EPS Surprise



Laboratory Corporation of America Holdings Price and EPS Surprise | Laboratory Corporation of America Holdings Quote

Notably, the company are not positive about the latest Centers for Medicare and Medicaid Services (CMS) publication of proposed 2018 Medicare reimbursement rates for clinical laboratory tests under the Clinical Lab Fee Schedule (CLFS). However, this will most likely have no impact on its third-quarter results.

Unfavorable foreign exchange continues to be a pressing concern for the company. Previously, LabCorp had anticipated an approximate 40-bps negative currency impact on 2017 revenues. The company currently expects a 20-bps impact from adverse foreign exchange on net revenue at Covance Drug Development in 2017.

LabCorp has been continuously grappling with the issue of rising operating expenses which has affected its margins in the last reported quarter. Also, the chances of a turnaround in the scenario any time soon are slim.

Meanwhile, on a positive note, LabCorp is focusing on research and development in collaboration with academic institutions in order to gain traction in the growing lab testing market. In July 2017, LabCorp launched ADAMTS13 test to distinguish diseases characterized by life-threatening, acute thrombotic microangiopathy (TMA). Also, in May, company expanded its VistaSeq Hereditary Cancer portfolio through the addition of 10 new test panels with focus on the risk of specific hereditary cancer syndromes.

LabCorp recently teamed up with Walgreens Boots Alliance, Inc. WBA to set up specimen collection service stations at various Walgreens stores across the United States. The company also expanded its reach by closing the acquisition of Mount Sinai Health System Clinical Outreach Laboratories in May 2017. LabCorp’s highly differentiated portfolio will be used by the existing customers of Mount Sinai. These developments are expected to boost the top line in the third quarter.

LabCorp’s companion diagnostics portfolio, which grew a robust 35% in the last couple of years, should maintain its momentum in 2017.

Earnings Whispers

Our proven model does not conclusively show that LabCorp is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP:  LabCorp has an Earnings ESP of -1.84%. This is because the Most Accurate estimate is pegged at $2.35 and the Zacks Consensus Estimate stands at $2.40. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: LabCorp has a Zacks Rank #2 which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise.

Stocks Worth a Look

Here are a few medical stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

The Cooper Companies, Inc. COO has an Earnings ESP of +0.43% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Henry Schein, Inc. HSIC has an Earnings ESP of +0.67% and a Zacks Rank #3.

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