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LabCorp (LH) Beats Q2 Earnings Estimates, Margins Decline

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  • LH

Laboratory Corporation of America Holdings LH or LabCorp reported second-quarter 2020 adjusted earnings per share (EPS) of $2.57, down 12.3% from the year-ago quarter. The adjusted figure that excludes the impact of CARES Act Emergency Funding was negatively impacted by the COVID-19 pandemic. However, the bottom line surpassed the Zacks Consensus Estimate of 78 cents.

On a reported basis, net earnings were $2.37 per share, a 22.8% improvement from the year-ago period.

Revenues in the quarter under review declined 3.9% year over year to $2.77 billion. However, it exceeded the Zacks Consensus Estimate by 14.3%.

The lower revenues can be attributed to 5.4% decline in organic revenues, 0.3% drop due to the disposition of a business and a 0.1% adverse impact from unfavorable foreign currency translation, partially offset by 1.9% growth from acquisitions.  Despite COVID-19 testing-related growth of 15.4%, the year-over-year decline in organic revenues was due to a significant 20.9% reduction in the company's organic Base Business due to the pandemic. The lower organic revenues could be attributed to a 0.5% adverse impact of lower Medicare and Medicaid pricing as a result of implementation of Protecting Access to Medicare Act (PAMA).

Quarter in Detail

LabCorp reports results under two operating segments — LabCorp Diagnostics and Covance Drug Development.

In the second quarter, LabCorp Diagnostics reported revenues of $1.69 billion, reflecting 3.9% decline year over year. On an organic basis, revenues declined 4.9%. This included a 30.1% negative impact from COVID-19 on organic Base Business, partially offset by 25.2% contribution from COVID-19 Testing. The decline of the organic Base Business includes a 0.8% negative impact from PAMA and a 1.2% reduction due to the September 2019 non-renewal of the BeaconLBS - UnitedHealthcare contract pertaining to the Florida market.

Laboratory Corporation of America Holdings Price, Consensus and EPS Surprise

Laboratory Corporation of America Holdings Price, Consensus and EPS Surprise
Laboratory Corporation of America Holdings Price, Consensus and EPS Surprise

Laboratory Corporation of America Holdings price-consensus-eps-surprise-chart | Laboratory Corporation of America Holdings Quote

Organic revenue decline was partially offset by acquisitions-related growth of 1.1%.

The company witnessed a 19.5% decline in total volume (measured by requisition). Organic volume declined 20.7%,partially offset by acquisition volume growth of 1.2%.The organic volume decline was primarily due to a 35.3% negative impact from COVID-19 on Base Business, partially offset by 14.6% increase in demand for COVID-19 Testing.

Covance Drug Development revenues declined 2.9% to $1.09 billion in the second quarter affected by a 5.2% decline in organic revenues, a 0.7% impact owing to the disposition of the Covance Research Products business and 0.1% impact of adverse foreign currency translation. This was partially offset by a 3.1% contribution from acquisitions.

Margins

Gross margin contracted 116 basis points (bps) to 27.5% in the second quarter. Also, adjusted operating income declined 11.1% year over year to $364.2 million. Adjusted operating margin contracted 106 bps from the year-ago quarter to 13.2%.

Cash Position

LabCorp exited the second quarter with cash and cash equivalents of $557 million compared with $323.6 million at the end of the first quarter. Cumulative cash flow from operating activities at the end of the second quarter was $574.5 million, up from $419.3 million a year ago. Additionally, cumulative free cash flow at the end of the second quarter was $369.4 million, up from $239.9 million a year ago.

Earlier, the company had temporarily suspended its existing share repurchase program due to the pandemic.

2020 View

The company did not provide 2020 guidance as it is still unable to gauge the impact of the ongoing COVID-19 pandemic. However, overall, it noted that, while LabCorp's Base Business continues to be negatively impacted by the pandemic, the company's outlook has improved across the business.

Our Take

LabCorp exited the second quarter of 2020 with better-than-expected earnings and revenues. However, these figures dropped year-over-year raising concerns.

Diagnostics business in the quarter was down on severe volume decline as a result of negative impact of COVID-19. Also, the disposition of certain businesses and the implementation of PAMA dented growth. This was however marginally offset by an increase in demand for COVID-19 tests.

Also, Covance Drug Development delivered lower sales on COVID-19 hurdles despite synergies from acquisitions.

The margin debacle and the absence of 2020 guidance are causes of concern.

Zacks Rank

LabCorp currently holds a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the broader medical space are ResMed Inc. RMD, Exact Sciences Corp. EXAS and ViewRay, Inc. VRAY. All the three stocks carry a Zacks Rank #2, at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for ResMed’s fourth-quarter fiscal 2020 revenues is pegged at $710.9 million, suggesting year-over-year improvement of 0.9%. The same for EPS stands at 99 cents, indicating growth of 4.2% from the year-ago reported figure.

The Zacks Consensus Estimate for Exact Sciences’ second-quarter 2020 revenues is $229.6 million, implying 14.9% increase from the year-earlier reported figure.

The Zacks Consensus Estimate for ViewRay’s second-quarter 2020 bottom line stands at a loss of 16 cents per share, suggesting 50% improvement from the year-ago quarter.

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ResMed Inc. (RMD) : Free Stock Analysis Report
 
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