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Why Is LabCorp (LH) Down 0.6% Since Last Earnings Report?

Zacks Equity Research
Bank of Marin (BMRC) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

It has been about a month since the last earnings report for LabCorp (LH). Shares have lost about 0.6% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important drivers.

Acquisition and Organic Growth Strong for LabCorp in Q4

LabCorp reported fourth-quarter 2018 adjusted earnings per share (EPS) of $2.52, up 11% from the year-ago quarter. The bottom line surpassed the Zacks Consensus Estimate by 1.6%.

On a reported basis, net earnings came in at $1.56 per share as compared with $6.63 a year ago.

Adjusted EPS in 2018 came in at $11.02, up 19.8% year over year. The figure also surpassed the Zacks Consensus Estimate of $11 by a slight margin.

Revenues in the quarter under review increased 1.6% year over year to $2.79 billion. The year-over-year rise was backed by 0.7% growth from acquisitions and organic growth of 2.9%, partially offset by a 1.6% negative impact from the disposition of businesses and a 40-basis point (bps) impact of foreign currency translation. The top line beat the Zacks Consensus Estimate by 0.2%.

Revenues in 2018 came in at $11.33 billion, up 9.9% year over year. The figure was in line with the Zacks Consensus Estimate.

Quarter Under Review

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

In the fourth quarter, LabCorp Diagnostics reported revenues of $1.69 billion, a 2.8% drop year over year. While revenues were fueled by tuck-in acquisitions, a favorable mix and organic volume (measured by requisitions), this was offset by the negative impact from the disposition of businesses and the implementation of the Protecting Access to Medicare Act (PAMA). In addition, foreign currency translation reduced revenue by approximately 0.2%.

Excluding the disposition of businesses, the company reported a 0.3% rise in total volume (measured by requisition) and a 0.4% decline in revenue per requisition in the quarter under review.

Covance Drug Development reported a 9.6% rise in revenues to $1.10 billion in the fourth quarter. The upside was primarily driven by acquisitions and organic growth, partially offset by the adverse impact of foreign currency translation of nearly 90 bps.

Gross margin deteriorated 210 bps to 27.7% in the reported quarter. Adjusted operating income was down 6.1% year over year to $375.5 million. Also, adjusted operating margin contracted 110 bps from the year-ago quarter to 13.5%.

LabCorp exited 2018 with cash and cash equivalents of $426.8 million compared with $316.6 million at the end of 2017. In 2018, operating cash flow was $1.31 billion, down from $1.50 billion in the year-ago period. Free cash flow came in at $925.6 million in this period, down from $1.19 billion a year ago.

During the quarter under discussion, the company returned $400 million to shareholders via share repurchases. LabCorp informed that the company’s existing share repurchase plan has been replaced with a new plan authorizing repurchase of up to $1.25 billion.

Outlook

LabCorp has provided its 2019 guidance.

Revenue growth is expected in the band of 0.5-2.5% from 2018. This includes the adverse impact from the disposition of businesses of around 1% and foreign currency translation of roughly 0.4%. The Zacks Consensus Estimate for current-year revenues is pegged at $11.51 billion.

Adjusted EPS for 2019 is projected in the range of $11 to $11.40. The consensus mark of $11.21 for the metric is within the guided range.

Free cash flow is projected in the band of $950 million-$1.05 billion.

How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, 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 A. 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 indicates a downward shift. 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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