Healthy LabCorp Passes Growth Test

3/2/2009


 

  Recent Price
$61
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
13
  Shares (millions)
110
  Long-Term Debt as % of Capital
37%
  52-Week Price Range
$79.99 - $52.93

Most winners of the stimulus game won’t start collecting their bounty until late 2009 or 2010, but Laboratory Corp. of America ($61; LH) could see an immediate lift.

The federal government will give states $87 billion to help them cope with Medicaid costs, in the process increasing payments to such medical-service providers as LabCorp. Federal insurance subsidies should also encourage more of the poor or unemployed to seek medical treatment, and LabCorp will capture a healthy share of the tests ordered by doctors.

Moreover, LabCorp’s recent push into nondiscretionary testing offers some insulation against economic weakness as cash-strapped patients forego all but the most important treatments. LabCorp is a Buy and a Long-Term Buy.

Vital signs stable
LabCorp controls about 20% of the U.S. market for laboratory tests. Size (No. 2 in the country) gives LabCorp a cost advantage over smaller rivals. LabCorp raised prices for Medicare and several large managed-care companies in 2009, although growth in Medicare reimbursements is likely to decline in 2010. Volumes weakened as the December quarter progressed, a trend likely to continue this year. However, specialty testing, representing 35% of sales, is less discretionary and less vulnerable to a recession.

The company offers more than 4,400 tests, everything from routine blood and urine analysis to pricey tests ordered by specialty physicians. Results for most routine tests arrive within 24 hours, another competitive advantage for LabCorp.

Specialty tests include screenings for infectious diseases, allergies, identity, and cancer. Specialty testing volume rose more than 13% in the December quarter, and management seeks to increase the specialty portfolio to 40% of revenue in the next three to five years. LabCorp intends to expand its geographic presence and product portfolio by scooping up more laboratories, particularly those performing specialty tests. In the laboratory industry, with its high fixed costs and large number of regional companies, acquisitions and licensing agreements represent an inviting source of growth.

Decent growth picture
In 2008, LabCorp earned $4.60 per share excluding special items, up 10%. Revenue increased 11% to $4.51 billion on higher volumes and the consolidation of a Canadian joint venture, while operating cash flow increased 10%. Bad debt represented 5.3% of revenue at the end of December, up modestly from 4.8% at the end of 2007.

While growth is likely to slow this year, LabCorp enjoys a strong, steady revenue stream from large contracts. 2009 represents the third year of an exclusive contact with insurer UnitedHealth Group ($24; UNH) that could generate $3 billion in sales over its 10-year lifespan. No national contracts are up for renewal this year. Consensus estimates project sales growth of 3% and per-share-profit growth of 6% this year.

Conclusion
Shares trade at 13 times trailing earnings, a 24% discount to the three-year average. An annual report for Laboratory Corporation of America Holdings is available at 358 S. Main St., Burlington, NC; 27215; (336) 229-1127; www.labcorp.com.


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