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What's in the Offing for LabCorp's (LH) Earnings in Q3?

Zacks Equity Research

Laboratory Corporation of America Holdings LH also known as LabCorp is slated to report third-quarter 2019 results on Oct 24, before the market opens.

In the last reported quarter, the company’s adjusted earnings exceeded the Zacks Consensus Estimate by 1.03%, the average trailing four-quarter beat being 0.42%.

Let's see how things are shaping up for this announcement.

Factors at Play

In the last few quarters, LabCorp’s underlying core business put up a stable performance. Within Diagnostics, the company is likely to have generated strong revenue growth in the third quarter of 2019, banking on the following facts:

First, in 2019, the company officially collaborated with Horizon, NJ-based UnitedHealthcare and Aetna, placing LabCorp in-network under all major national plans. Ever since, the company has been registering consistent organic growth on the back of these partnerships. The upside is likely to get reflected in the company’s third-quarter results.

Second, the company is expected to have advanced its companion diagnostics and oncology capabilities in the third quarter, backed by the introduction of two new companion diagnostic tests, namely PIK3CA for breast cancer and FGFR for bladder cancer. This, in turn, might have contributed to the company’s upcoming earnings release.

Laboratory Corporation of America Holdings Price and EPS Surprise

Laboratory Corporation of America Holdings Price and EPS Surprise

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

Third, in the last reported quarter, PAMA (Protecting Access to Medicare Act) had a negative impact of 90 basis points on organic revenues. The company is currently working to overcome the inequitable Medicare price reductions imposed by the flawed implementation of PAMA. To this end, it is considering the lately-introduced Laboratory Access for Beneficiaries Act as a significant step to reform PAMA for producing a market-based Medicare fee schedule. However, with near-term visibility seeming bleak at the moment, we anticipate PAMA to once again dent the third-quarter top line.

Third, the company is highly optimistic about the Phase II of LaunchPad initiative in Diagnostics, which is expected to deliver $200 million of savings in another three years. Good news is that this program is already likely to have boosted the company’s operational efficiency in the third quarter.

Within Covance Drug Development, LabCorp is focused on driving profitable growth through expanded solutions and enhanced operational capabilities. The Chiltern integration has significantly strengthened the company’s strategic position in clinical development and is accelerating revenues and profit growth within Covance. On this front, the company is keeping a good pace with its objective to streamline the drug development process. This steady effort should get reflected in the company’s impending results.

Additionally, the company has progressed with the Covance LaunchPad initiative. In the first phase, as expected, the company achieved a cost synergy of $30 million from the acquisition of Chiltern. At the exit of second-quarter 2019, it remained on track to deliver $150 million of net savings by the end of 2020. This momentum is mostly likely to have been maintained through the company’s third quarter, strengthening LabCorp’s bottom line.

This apart, the innovative business swap transaction with Envigo is expected to have favored the company’s top line in the third quarter. The transaction provides Covance with better global non-clinical research capabilities while sustaining access to bigger research models and services through a multi-year renewable supply agreement.

For 2019, on an overall basis, management envisions modest growth in total revenues as well as the adjusted EPS. The company expects another year of approximately $1 billion in free cash flow. All these are likely to get reflected in third-quarter performance.

Which Way Are Estimates Trending?

The Zacks Consensus Estimate for third-quarter earnings of $2.84 indicates a 3.7% rise from the year-ago reported figure. The consensus estimate for revenues is pegged at $2.91 billion, suggesting a 2.8% increase from the prior-year reported number.

What the Quantitative Model Suggests

Per our proven model, a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to deliver a positive earnings surprise. This is not the case here as you will see below.

Earnings ESP: LabCorp has an Earnings ESP of -0.16%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: LabCorp carries a Zacks Rank #3. 

Stocks Worth a Look

Here are a few medical stocks worth considering with the right combination of elements to beat on earnings this reporting cycle.

ViewRay, Inc. VRAY has a Zacks Rank #2 and an Earnings ESP of +17.36%. You can see the complete list of today’s Zacks #1 Rank stocks here.

DENTSPLY SIRONA XRAY has a Zacks Rank of 3 and an Earnings ESP of +5.05%.

Aurora Cannabis Inc. ACB is Zacks #3 Ranked and has an Earnings ESP of +22.22%.

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