The announcement of Laboratory Corporation of America Holdings’ (LH) first quarter of fiscal 2012 results on April 19 has led analysts to reduce their estimates for the two forthcoming quarters.
First Quarter Highlights
LabCorp reported earnings per share (“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 still 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.
For a full coverage on the earnings, read: LabCorp Beats in a Milder 1Q
Agreement of Analysts
With economic uncertainty resulting in lower visits to physicians, estimate revision trend is on the negative for the next two quarters. Over the last 7 days, 9 of the 18 analysts covering the stock have lowered their estimates for the second quarter of fiscal 2012, with only 3 revisions northward. However, the trend reverses for fiscal 2012 with 9 upward revisions and 1 moving in the opposite direction in the past week.
The pessimistic sentiment emanates from the declining trend in LabCorp’s organic growth seen over the past few quarters though it recovered nominally to 1% in the first quarter of 2012 (3% in first, 2% in second, 1.2% in the third and 0.7% in the fourth quarter of fiscal 2011).
The downward revision in estimates is also supported by the company reiterating its guidance despite pulling off a first-quarter beat. Share repurchases have also not been included in the guidance.
However, LabCorp expects utilization trends to improve in the back half of the year. Moreover, volumes could pick up over the rest of the year as the comparisons get easier. This is because the company had experienced a sequential decline in volume growth in 2011.
Gross margin was under pressure in the first quarter due to the early stage in the integration process of the acquired Orchid Cellmark and Clearstone Laboratories. As the year progresses, the company should benefit from these acquisitions that will be reflected in its margins and ultimately the bottom line.
Magnitude of Estimate Revisions
The consensus estimate for the second quarter dropped by a penny to $1.77 in the past week. The consensus estimate for fiscal 2012, on the other hand, increased by 4 cents to $7.03 over the last 7 days indicative of market optimism over a longer period on the back of improvement in macroeconomic trends.
Neutral on LabCorp
LabCorp continues to focus on strategic initiatives to drive growth and profitability. 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 from the current level of 41%. LabCorp is also paying due attention to IT initiatives to improve physician and patient experience.
LabCorp continues to work closely with Managed Care Organizations (MCOs) by providing value added capabilities and services. Based on the extension of the contract with UnitedHealthcare, LabCorp will continue to be its sole national laboratory till 2018.
Moreover, the company renewed its contract with Horizon Blue Cross Blue Shield recently on the same terms, on a “multi-year basis.” The next MCO contract coming up for renewal, on a national level, is for Humana (HUM) in 2012 and LabCorp is working on it. The year 2013 is significant when contracts with Wellpoint (WLP) and Cigna (CI) will be due for renewals.
The stock retains a Zacks #3 Rank (Hold) in the short term. Over the long term, we have a Neutral recommendation on LabCorp.
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