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LabCorp (LH) Down 3.4% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for LabCorp (LH). Shares have lost about 3.4% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is LabCorp due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Business Disposition and Currency Translation Dent LabCorp's Growth in Q2

LabCorp reported second-quarter 2019 adjusted earnings per share (EPS) of $2.93, down 1.7% from the year-ago quarter. However, the bottom line edged past the Zacks Consensus Estimate by 1%.

On a reported basis, net earnings came in at $1.93 per share, declining 14.9% from the year-earlier figure.

Revenues in the quarter under review edged up 0.5% year over year to $2.88 billion. However, the top line lagged the Zacks Consensus Estimate of $2.90 billion.

This marginal year-over-year improvement was primarily led by 1.4% growth from acquisitions and organic growth of 1.7% (which includes the negative impact from Protecting Access to Medicare Act or PAMA of 0.9%), partially offset by a 1.9% negative impact from the disposition of businesses and an adverse foreign currency translation of approximately 0.7%.

Quarter Under Review

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

In the second quarter, LabCorp Diagnostics reported revenues of $1.76 billion, reflecting a 2.9% dip year over year. This downside was primarily due to a 2.8% headwind from the disposition of businesses and 0.3% lower organic revenues (including a 1.5% negative impact from the implementation of the PAMA). In addition, unfavorable foreign currency translation reduced revenues by approximately 0.2%. Growth from acquisitions was 0.4% in the quarter.

Excluding the disposition of businesses, the company reported a 0.9% slip in total volume (measured by requisition) and a 1% rise in revenue per requisition in the quarter under consideration.

Covance Drug Development’s revenues improved 6.8% to $1.13 billion in the second quarter. This upside was primarily attributed to 3.3% growth from acquisitions and organic growth of 5.5%, partially offset by the 1.6% adverse impact of foreign currency translation and a business disposition of 0.3%.

Gross margin contracted 51 bps to 28.6% in the reported quarter. Also, adjusted operating income was down 6.9% year over year to $410 million. Moreover, adjusted operating margin contracted 114 bps from the year-ago quarter to 14.2%.

LabCorp exited the second quarter with cash and cash equivalents of $265.4 million compared with $348.8 million at the end of the first quarter. Further, year to date, operating cash flow was $419.3 million, down from $567.1 million in the year-ago period. Additionally, free cash flow came in at $239.9 million in the period, down from $407.4 million a year ago.

In the quarter under discussion, the company returned $199.9 million to shareholders via share repurchases. LabCorp currently has $1.05 billion of authorization remaining under its existing share buyback plan.

Outlook

LabCorp has updated its 2019 guidance.

Revenue growth expectation has been tightened to the band of 1-2% from 2018 (earlier projected band was 0.5-2.5%). This includes a projected adverse impact from the disposition of businesses of around 1.5% and a negative foreign currency movement of roughly 0.5%. The Zacks Consensus Estimate for current-year revenues is pegged at $11.46 billion.

Adjusted EPS estimate for 2019 has been narrowed to a range of $11.10-$11.40 from the earlier band of $11.05-$11.45. The consensus mark of $11.28 for the metric is within this guided range.

Free cash flow is predicted from $950 million to $1.05 billion (unchanged).
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, LabCorp has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, LabCorp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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