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Can Covance Business Growth Aid LabCorp (LH) in Q1 Earnings?

Zacks Equity Research

Laboratory Corporation of America Holdings LH also known as LabCorp, is slated to report first-quarter 2019 results on Apr 30, before the market opens. In the last reported quarter, the company’s adjusted earnings exceeded the Zacks Consensus Estimate by 1.61%. The average trailing four-quarter beat was 1.11%.

Let's see how things are shaping up for this announcement.

Factors at Play

LabCorp’s underlying core business is currently showing a stable performance. Within Diagnostcs, the company expects to generate revenues in the first quarter of 2019, banking on the following number of facts:

First, the company already reported that the January volume related to contract changes has been in line with the company’s expectations. Second, referral volumes from hospitals and health systems should increase during the first quarter.

Laboratory Corporation of America Holdings Price and EPS Surprise

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

Third, although the company expects to gain a judicial and legislative relief from the second round of PAMA (Protecting Access to Medicare Act) price reductions, there is an increasing industry-wide awareness about PAMA's true impact. Per LabCorp, with this, the company will be offered a string of attractive tuck-in lab acquisition opportunities, which would typically deliver significant synergies and high returns on invested capital.

Fourth, the company is highly optimistic about the Phase II of LaunchPad initiative in Diagnostics, which is expected to deliver $200 million of savings in another three years. This should start contributing to the company’s operational results from the first quarter itself.

This apart, in the first quarter, LabCorp is expected to particularly benefit from its several recent collaborations. Among the company’s recent alliances, worth mentioning are the company’s tie-ups with UnitedHealthcare and Aetna, which helped LabCorp become a contracted laboratory provider for all major national plans. With the latest agreement, LabCorp will continue to be a national in-network laboratory for all UnitedHealthcare plan participants on a long-term basis. This apart, starting this January onward, LabCorp also became a national, in-network provider of laboratory services for substantially all Aetna members. We expect to see some strong top line contributions from these alliances in the first quarter.

However, within Diagnostics, the fourth quarter of 2018 witnessed trouble regarding a number of nonoperational items, causing a 400-basis point decline in the reported operating margin.  The same has been apprehended for the yet-to-be-reported quarter.

Within this segment, 2019 revenues are expected in the range of a negative 2-4% as compared to 2018, inclusive of a foreign currency translation of approximately negative 30 basis points. This apart, PAMA is expected to trim Diagnostics revenues by approximately 1.6% in 2019.

Within Covance Drug Development, LabCorp is focused on driving future profitable growth through expanded solutions and enhanced operational capabilities. Chiltern integration has significantly strengthened the company’s strategic position in clinical development and is accelerating revenues and profit growth within Covance. On this front, the company is keeping a good pace with its objective to streamline the drug development process. Significantly, it is winning new awards through its integrated Covance and Chiltern offering.

Additionally, the company has progressed with the Covance LaunchPad initiative. In the first phase, as expected, the company generated pre-tax savings of $20 million.  At the exit of fourth-quarter 2018, it remains on track to deliver $150 million of net savings from Covance LaunchPad by the end of 2020 and another $30 million of cost synergies from the Chiltern buyout by 2019 end.

All the above factors should together constantly favor the top line at LabCorp's Covance Drug Development in the yet-to-be reported quarter. Overall, the company currently expects 2019 Covance Drug Development revenue growth within 5-9%.

For 2019, on an overall basis, LabCorp expects modest growth in total revenues and the adjusted EPS. The company expects another year of approximately $1 billion in free cash flow. These should get reflected in the first quarter itself.

What the Quantitative Model Suggests

Our proven Zacks model conclusively shows that a company with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has good chances of beating estimates if it also has a positive Earnings ESP.

LabCorp has a Zacks Rank #3, which increases the predictive power of ESP. It also has an Earnings ESP of +0.36%, together which a likely positive surprise is predicted for the stock this earnings season.

The Zacks Consensus Estimate for first-quarter earnings of $2.53 indicates an 8.9% decline from the year-ago reported figure. Revenue increase is pegged at $2.82 billion, suggesting a 0.86% slip from the prior-year number. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter.

Other Stocks to Consider

Here are a few other medical stocks worth considering from the broader medical space as these too comprise the right mix of elements to exceed expectations this reporting cycle.

Evolus, Inc. EOLS has an Earnings ESP of +24.39% and a Zacks Rank of 3.

NanoString Technologies Inc. NSTG has an Earnings ESP of +3.08% and is a Zacks #3 Ranked player. You can see the complete list of today’s Zacks #1 Rank stocks here.

Aurora Cannabis, Inc. ACB has an Earnings ESP of +73.33% and is a #3 Ranked player.

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