Here's Why Investors Should Retain Labcorp (LH) Stock for Now
Laboratory Corporation of America Holdings LH, or Labcorp, is poised to gain in the coming quarters, backed by strategic partnerships with healthcare systems. The company is committed to making investments in higher-growth opportunities, including cell and gene therapy and liquid biopsy. The successful Fortrea spin-off transaction is intended to enable appropriate value-creating investments and unlock shareholder value.
However, LH is struggling with the significant drop in COVID-19 testing revenues. Increased competition could further affect the company’s results of operations.
In the past year, this Zacks Rank #3 (Hold) stock has declined 1.5% compared to a 21.1% growth of the industry and a 17.6% rise of the S&P 500.
The renowned healthcare diagnostics company has a market capitalization of $18.19 billion. In the trailing four quarters, the company delivered an average negative earnings surprise of 1.09%.
Let’s delve deeper.
Factors at Play
Strategic Partnerships to Drive Growth: Labcorp continues to progress in terms of integrating hospital partnerships and acquisitions. The expansive collaboration with Ascension announced in 2022, through which Labcorp provides laboratory management services for nearly 100 hospitals across the Ascension hospital system, is one such strong proof point.
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Another R&D-based collaboration, which the company recently finalized, was with Jefferson Health — one of the largest health systems serving the Greater Philadelphia area in Southern New Jersey. In May, Labcorp expanded its strategic relationship with Providence Health to acquire Providence Oregon's outreach laboratory business and select assets.
Targeted Development in High-Growth Areas: In its efforts to further expand, Labcorp is focusing more on high-growth opportunity areas such as neurodegenerative, autoimmune and liver disease, as well as cell and gene therapy. In addition, investments in innovation and technology will support diagnostic and drug development testing across disease areas, including cancer, Alzheimer’s and other diseases.
The launch of Labcorp Plasma Focus is a critical step in the expansion of Labcorp's suite of precision oncology tests. LH remains at the forefront of driving better patient outcomes in oncology, following the acquisition of Personal Genome Diagnostics Inc. in early 2022. In May 2023, the company teamed up with Forge Biologics for adeno-associated virus gene therapy development and collaboration.
Spin-Off of the CDSS Business to Add More Value: In June 2023, Labcorp completed the planned spin-off of its wholly owned Clinical Development and Commercialization Services (“CDCS”) business, resulting in two independent companies — Labcorp (comprising the company’s routine and esoteric labs, central labs and early development research labs) and Fortrea (a global contract research organization providing Phase I-IV clinical trial management, market access and technology solutions to pharmaceutical and biotechnology organizations).
The spin-off is expected to provide Labcorp with strengthened strategic flexibility and an operational focus to pursue specific market opportunities and better meet customer needs, focused capital structures and capital allocation strategies to drive innovation and growth, a more targeted investment opportunity for different investor bases and the ability to align its particular incentive compensation with its financial performance.
Downsides
Lower COVID-19 Testing Sales & Supply Constraints Persist: As the severity of the pandemic continues to weaken, Labcorp has been witnessing a significant decline in COVID-19 PCR testing volumes for some quarters.
Meanwhile, Labcorp’s Early Development Research Laboratories business continues to be constrained by non-human primate-related supply-chain issues. Although the company expects to resolve the issue by the third quarter, the likelihood of such constraints remains.
Competitive Landscape: Labcorp faces intense competition from its major competitor, Quest Diagnostics, and other commercial laboratories and hospitals. With pricing being an important factor in choosing a testing lab, hospital-affiliated physicians expect a high level of service, including an accurate and rapid turnaround of testing results. As a result, Labcorp and other commercial labs compete with hospital-affiliated labs, primarily on the basis of the quality of service.
Estimate Trend
In the past 30 days, the Zacks Consensus Estimate for Labcorp’s 2023 earnings has remained constant at $13.68 per share.
The Zacks Consensus Estimate for 2023 revenues is pegged at $12.09 billion, suggesting an 18.7% drop from the 2022 comparable figure.
Key Picks
Some better-ranked stocks in the broader medical space are Haemonetics HAE, Intuitive Surgical ISRG and Quanterix QTRX.
Haemonetics has an estimated earnings growth rate of 26.1% in fiscal 2024 compared with the industry’s 18.7%. HAE’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 19.39%. Its shares have rallied 19.3% against the industry’s 1.8% fall in the past year.
HAE carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Intuitive Surgical, carrying a Zacks Rank #2 at present, has a long-term estimated earnings growth rate of 15.7% compared with the industry’s 15.5%. Shares of the company have rallied 54.1% compared with the industry’s 1.9% growth over the past year.
ISRG’s earnings surpassed estimates in three of the trailing four quarters and missed in one, the average surprise being 4.19%.
Quanterix, carrying a Zacks Rank #2 at present, has an estimated earnings growth rate of 62.8% for the current year compared with the industry’s 15.2%. Shares of QTRX have surged 177.7% against the industry’s 1.8% decline over the past year.
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