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LabCorp Lags on Earnings & Revs, Poor Outlook

Zacks Equity Research

Laboratory Corporation of America Holdings (LH) reported fourth-quarter 2013 adjusted earnings per share (EPS) of $1.61, up 4.5% year over year. However, it remained far behind the Zacks Consensus Estimate of $1.67.

On a reported basis, after including amortization (15 cents), restructuring and other special charges (3 cents), LabCorp’s net earnings came in at $126.3 million or $1.43 per share against net earnings of $120.2 million or $1.26 per share in the year-ago quarter.

For full year 2013, although adjusted EPS edged up 1.9% from the prior year to reach $6.95, it lagged the Zacks consensus Estimate by 4 cents.

Quarter Under Review

Revenues improved 2.3% year over year to $1,437.0 million in the fourth quarter, marginally missing the Zacks Consensus Estimate of $1,449 million. The year 2013 recorded revenues of $5,808.3 million, up 2.4% from the prior year. However, this also failed to meet the Zacks Consensus Estimate of $5,817 million.

Although the company witnessed a 5.0% increase in testing volume (measured by requisitions), poor revenue per requisition (down 2.0% year over year) reflects government payment reductions and payment issues related to molecular pathology codes. We note that lower healthcare utilization and Medicare payment reductions also affected LabCorp’s peer Quest Diagnostics’ (DGX) fourth-quarter results.

Gross margin fell 167 basis points (bps) to 36.6% in the quarter. Adjusted operating income declined 7.2% year over year to $240.4 million in the reported quarter. This led to an adjusted operating margin of 16.7%, down 172 bps from the year-ago quarter. During the quarter under review, selling, general and administrative expenses scaled up 2.5% to $285.7 million.

LabCorp exited the fiscal with cash and short-term investments of $404.0 million compared with $466.8 million at the end of 2012. At present, the company had no borrowings outstanding under its $1.0 billion revolving credit facility. Operating cash flow for the year was $818.7 million, down from the year-ago level of $841.4 million.

During the quarter, LabCorp repurchased 2.5 million shares for $251.6 million and was left with $1,052.5 million of authorization under the approved share repurchase plan. A consistent share buyback program led to a 6.1% decline in the outstanding share count thereby boosting earnings per share.


The company provided an update on its 2014 EPS guidance which it first provided in December. The company currently expects its guidance for adjusted earnings per share to remain in the range of $6.35 to $6.65 from the earlier provided projection of $6.50. The current Zacks Consensus Estimate of $6.76 remains ahead of the revised range.

A dismal performance while exiting 2013 forced LabCorp to maintain its feeble revenue guidance for 2014. The company still expects revenue growth of a mere 2%. However, the Zacks Consensus Estimate of $5,907 million falls marginally short of the guidance. In addition, operating cash flow and capital expenditures are expected to remain in the band of $780−$820 million and $185−$205 million respectively.

Our Take

The current economic uncertainty continues to adversely affect LabCorp. The company is currently plagued by several issues like utilization weaknesses and continued increase in Americans with high deductible and high co-insurance plans. Additionally, ongoing government payment and reimbursement issues along with uncertainty related to the implementation of the Affordable Care Act are other looming headwinds.

However, LabCorp remains optimistic about its five-pronged strategy which is expected to revive growth in its businesses and create continued shareholder value. As a part of this strategy, LabCorp is currently working on innovations with academic institutions in order to capture the growing lab testing market with its advanced assays and tools. It is currently working on customer service, IT and laboratory automation besides emphasizing on strategic transactions and comprehensive review of the cost structure.

The stock currently carries a Zacks Rank #4 (Sell).  Some of the better-placed Medical stocks are Align Technology Inc. (ALGN) and CR Bard Inc. (BCR), both carrying a Zacks Rank #2 (Buy).

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