Analysts' Choice: Go With LabCorp, A Tested Performer

8/21/2017


  Recent Price
$156
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
17
  Shares (millions)
107
  Long-Term Debt as % of Capital
49%
  52-Week Price Range
$164.22 - $119.51

Despite the size and ubiquity of LabCorp of America ($156; LH), most Americans have probably never heard of it. The company operates roughly 1,800 service centers providing more than 4,800 tests, and at the end of last year processed an average of 500,000 specimens a day.

Given its scope as the second-largest independent clinical laboratory in the U.S., why isn't LabCorp a household name? Because the company bills most of its tests directly to insurance companies, not to the patient. Millions of people use LabCorp's services and never realize it.

Of course, there's more to LabCorp than diagnostic tests. In an effort to expand beyond its core diagnostics business, LabCorp purchased contract researcher Covance in 2015. In the first half of this year, outsourced research accounted for 28% of company revenue.

The consensus calls for sales growth of 6% and per-share-profit growth of 8% this year, accelerating to 7% and 9%, respectively, in 2018. Most analysts expect the diagnostics business to generate the bulk of company's growth, and LabCorp's planned purchase of British contract-research provider Chiltern (more on that below) could help even out the disparity. We rate LabCorp a Buy and a Long-Term Buy.

Research acquisition

Standard & Poor's expects the contract-research industry to expand at an annual rate of 7% to 8%, well above the low-single-digit growth rate for clinical laboratory work. However, Covance's lack of a presence in Asia has limited LabCorp's profit potential in world where about two-thirds of clinical trials have an international component. Chiltern should also help on this front.

Late last month, LabCorp announced plans to buy Chiltern for $1.2 billion in cash. The deal will boost LabCorp's contract-research backlog by $1 billion, or about 17%, and start adding to adjusted earnings in about a year. However, the biggest impact involves global reach. Chiltern employs more than 700 people in the Asia-Pacific region.

The acquisition will further diversify LabCorp's research unit by boosting exposure to oncology and the FSP (functional service provider) space. The FSP model offers drug companies greater flexibility, outsourcing different parts of their drug-development business to different firms, rather than entrusting the entire process to one CRO. According to Chiltern, the FSP model is gaining popularity and growing faster than traditional CRO revenue. 

Solid results

Shares of LabCorp jumped after the company declared better-than-expected June-quarter operating performance and boosted its full-year sales and profit targets. For the year, LabCorp has risen 22%, versus 15% for the S&P 1500 Health Care Sector Index. Despite that encouraging market action, the shares remain appealingly priced at 17 times trailing earnings, a 20% discount to the median health-care services provider in the S&P 1500 Index.

Obtainan annual report for Laboratory Corp. of America Holdings at 358 S. Main St., Burlington, NC 27215, (336) 229-1127, www.labcorp.com.

LABCORP OF AMERICA
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '17
2.47
vs.
2.36
5%
154.82
-
134.19
17 - 15
Mar '17
2.22
vs.
2.05
3%
145.00
-
128.00
16 - 15
Dec '16
2.15
vs.
1.98
6%
140.27
-
119.51
16 - 14
Sep '16
2.25
vs.
2.07
4%
141.32
-
129.68
17 - 15
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
9.64
8.83
0.00
141.32
-
97.79
16 - 11
2015
8.68
7.91
0.00
131.19
-
105.77
17 - 13
2014
6.01
6.80
0.00
109.84
-
87.25
16 - 13
2013
5.81
6.95
0.00
108.00
-
85.80
16 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
88
65
68
74
47
89
82

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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