We recently reiterated our Neutral recommendation on Laboratory Corporation of America Holdings (LH), the second largest independent clinical laboratory company in the U.S. While we are confident about the company garnering higher revenues from specialized testing, its stable liquidity position and value added acquisitions, concerns linger around the overall soft industry trends leading to low organic volume. The stock currently carries a Zacks Rank #3 (Hold).
Why at Neutral?
LabCorp posted dismal fourth-quarter 2012 results with adjusted earnings per share (EPS) of $1.54 missing the year-ago number by 1.3% as well as the Zacks Consensus Estimate of $1.61.Although revenues increased 2.9%, a mere 2.8% increase in testing volume and a slight increase of 0.7% in organic volume growth reflect the low-volume-growth environment. Also, Hurricane Sandy negatively impacted the company’s performance in the fourth quarter.
Moreover, concerns linger regarding the on-going reimbursement cut. The government has been attempting to control reimbursement of healthcare services including clinical testing. Changes in governmental regulations will have a significant impact on LabCorp’s operations in 2013. According to LabCorp, this reduction will negatively impact 2013 revenue by over $50.0 and earnings per share by approximately $0.35.
However, we are encouraged to note that LabCorp recorded approximately 40% of total revenues during the last reported quarter from the genomic, esoteric and anatomic pathology categories, which is expected to go up to 45% over the next 3−5 years. The esoteric volume during the quarter increased 3.5% on the back of decent growth in specialized endocrinology and coagulation businesses, cardiovascular and chronic kidney disease programs.
As a result, the company is continuously launching several new tests and has collaborated with major companies and academic institutions to develop advanced tests. Given its continuous focus on portfolio expansion, we are confident about the company garnering higher revenues from specialized testing, going forward.
Other Stocks to Consider
While we prefer to remain on the sidelines on LabCorp, other medical device stocks worth a look are Cyberonics Inc. (CYBX), Medical Action Industries Inc. (MDCI) and Given Imaging Ltd. (GIVN). All these stocks carry a Zacks Rank #1 (Strong Buy).
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