Laboratory Corporation of America Holdings (LH) is scheduled to release its third quarter 2012 earnings on Thursday, October 18, 2012, before the market opens. The company is expected to report earnings of $1.74 per share on revenue of $1.44 billion for the quarter, according to the Zacks Consensus Estimates.
LabCorp reported earnings of $1.56 per share in the second quarter of fiscal 2012 compared with $1.20 in the year-ago quarter. Restructuring charges aside, the company recorded expenses related to acquisitions and losses on the disposal of one of its European subsidiaries and one of its joint ventures. Adjusted earnings 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 level 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 narrowed its guidance for fiscal 2012. The company expects 2−3% revenue growth (previous guidance of 2−3.5%) resulting in adjusted earnings of $6.80−$7.00 ($6.75−$7.05) per share in the said fiscal.
Agreement of Analysts
Estimate revisions for the third quarter have been primarily on the negative side in the past 7 and 30 days. Only one analyst lowered the estimate over the past week with no upward movement. The last 30 days witnessed revisions in the negative direction by two analysts. The negative sentiment continued for 2012 as well, with one downward revision over the past 30 days and no positive revision.
The cautious sentiment emanates from the adverse macro situation that has dealt a blow to industry volumes resulting from reduced physician office visits. As a result, the company’s organic growth has been on a declining trend over the past few quarters. The current state of affairs would be better understood with LabCorp’s peer Quest Diagnostics (DGX) reporting on October 17.
LabCorp is expected to update its contract extensions as renewal with Humana (HUM) is expected to come up at the end of 2012. Meanwhile, shares of LabCorp have been trading up over the recent past with rumors about a possible acquisition. However, the company denied any such development.
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. The recent acquisition of Medtox Scientific will enable LabCorp to strengthen its foothold in specialized toxicology testing. We expect LabCorp to share some details regarding this deal.
Magnitude of Estimate Revisions
Given the nominal estimate revisions, the consensus estimate for the current quarter has dropped by a penny to $1.74 over the last 30 days. However, the estimate for fiscal 2012 has remained static in the last month.
Going by past trends, we expect LabCorp to exceed estimates. Barring the second quarter of 2012, the company exceeded estimates in the past four quarters with a positive four-quarter average of 1.57%. This means that on an average, LabCorp has topped the Zacks Consensus Estimate by this magnitude over the last four quarters.
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.
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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