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LabCorp (LH) Q3 Earnings Surpass Estimates, Tapers View

Zacks Equity Research

Laboratory Corporation of America Holdings LH, or LabCorp, reported third-quarter 2019 adjusted earnings per share (EPS) of $2.90, up 5.8% from the year-ago quarter. Also, the bottom line surpassed the Zacks Consensus Estimate by 2.1%.

On a reported basis, net earnings were $2.25 per share, declining 27.4% from the year-earlier figure.

Revenues in the quarter under review grew 3.4% year over year to $2.93 billion. The top line also beat the Zacks Consensus Estimate of $2.91 billion by 0.7%.

The marginal year-over-year improvement was primarily led by 2.8% growth from acquisitions and 2.2% organic growth (which includes the negative impact of Protecting Access to Medicare Act or PAMA of 0.9%), partially offset by 1.3% negative impact of business dispositions and approximately 0.3% adverse foreign currency translation.

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

Quarter in Detail

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

In the third quarter, LabCorp Diagnostics reported revenues of $1.76 billion, reflecting a 0.4% uptick year over year. The upside primarily resulted from 0.9% organic growth and 0.8% favorable contribution from acquisitions, offset by 1.3% headwind from business dispositions. Organic revenue growth in the quarter included a 1.5% negative impact from the implementation of the PAMA.

Excluding business dispositions, the company witnessed 0.7% rise in total volume (measured by requisition) and 1% improvement in revenue per requisition in the third quarter.

Covance Drug Development’s revenues improved 8.7% to $1.18 billion in the third quarter. The upside was primarily attributed to 6% growth from acquisitions and 4.7% organic growth, partially offset by 0.8% adverse impact of foreign currency translation and business disposition of 1.2%.

Gross margin remained flat year over year at 27.9% in the reported quarter. Also, adjusted operating income rose 1.9% year over year to $430.5 million. However, adjusted operating margin contracted 22 bps from the year-ago quarter to 21.5%.

LabCorp exited the third quarter with cash and cash equivalents of $361.1 million compared with $265.4 million at the end of the second quarter. Year to date, operating cash flow was $874.9 million, up from $819 million in the year-ago period. Additionally, free cash flow was at $602.9 million in the quarter, up from $561.4 million a year ago.

In the third quarter, the company returned $100 million to shareholders via share repurchases. LabCorp currently has $950 million of authorization remaining under its existing share buyback plan.

Outlook

The company has revised its 2019 guidance.

It now expects year-over-year revenue growth of 1.5-2% compared with 1-2% mentioned earlier. This includes a projected adverse impact of 1.5% from the disposition of businesses and a negative foreign currency movement of roughly 0.6%. The Zacks Consensus Estimate for revenues is pegged at $11.48 billion for the current year.

Adjusted EPS estimate for 2019 has been narrowed to $11.20-$11.30 from $11.10-$11.40 mentioned earlier, indicating 1.6-2.5% rise from the 2018 adjusted EPS figure. The Zacks Consensus Estimate of $11.29 for the same is close to the high end of the company’s guidance.

Free cash flow is predicted to be $950-$1.05 billion (unchanged).

Our Take

LabCorp exited the third quarter on a strong note, with better-than-expected results. While increasing acquisitions and a favorable mix contributed to its Diagnostics business in the quarter, the disposition of certain businesses and the implementation of PAMA dented the company’s growth.

However, Covance Drug Development delivered year-over-year growth. Here, synergies from acquisitions and organic growth were partially negated by the impact of foreign currency translation.

Zacks Rank & Stocks to Consider

Currently, LabCorp carries a Zacks Rank #4 (Sell). Some better-ranked stocks from the broader medical space are Owens & Minor, Inc OMI, Surmodics, Inc SRDX and Organigram Holdings Inc OGI.

Owens & Minor is scheduled to release third-quarter 2019 results on Oct 30. The Zacks Consensus Estimate for the quarter’s adjusted EPS is pegged at 65 cents and the same for revenues is pinned at $9.9 billion. The stock currently sports a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Surmodics is scheduled to release fourth-quarter 2019 results on Nov 8. The Zacks Consensus Estimate for its adjusted EPS is pinned at 69 cents and the same for revenues is pegged at $97.8 million. The stock currently sports a Zacks Rank #1.

Organigram is expected to release fourth-quarter 2019 results on Nov 25. The Zacks Consensus Estimate for its adjusted EPS is pegged at 5 cents and the same for revenues is pinned at $71.2 million. The stock presently has a Zacks Rank of 2 (Buy).

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