LabCorp Aces Recession's Test

11/30/2009


  Recent Price
$74
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
15
  Shares (millions)
109
  Long-Term Debt as % of Capital
37%
  52-Week Price Range
$74.72 - $53.25

Laboratory Corp. of America ($74; LH) offers 4,400 tests, ranging from routine blood and urine analysis to specialty and esoteric tests. As the country’s second-largest independent clinical laboratory, LabCorp enjoys cost advantages that elude smaller rivals.

Throughout the recession, LabCorp posted higher quarterly sales, extending a growth streak that stretches back to 1998. Despite its operating momentum, the stock appears modestly priced. LabCorp, already a Long-Term Buy, is being added to the Buy List.

Business breakdown

LabCorp operates in a $52 billion market dominated by hospital-affiliated laboratories. LabCorp controls about 9% of the U.S. market, second only to Quest Diagnostics’ ($59; DGX) 14% share. The other 5,100 independent labs control 12% of the market, with the rest in the hands of labs affiliated with hospitals and physicians’ offices.

Esoteric testing represents one of LabCorp’s most promising growth avenues. Esoteric tests, which tend to be more expensive than other tests, focus on infectious diseases, allergies, identity (DNA testing), and oncology. The esoteric business accounts for about 36% of revenue, and LabCorp sees that slice widening to 40% in the next three to five years. The remaining 64% of sales come from core operations, such as blood analysis, HIV tests, microbiology cultures, and substance-abuse tests.

In past years, LabCorp has increased sales through acquisitions and organic expansion, placing less significance on price hikes. Management sees plenty of opportunities to expand its esoteric-testing business and push into new geographic markets through acquisitions. Should profitable opportunities become scarce, LabCorp is expected to push harder for price increases.

An exclusive 10-year contract with UnitedHealth Group ($29; UNH) generates about 9% of LabCorp’s annual revenue. LabCorp received an estimated 7% price increase from UnitedHealth in October, well above last year’s 4% hike. The new rate eases fears that big managed-care contracts are tied to inflation benchmarks and also suggests that LabCorp may have the leverage to squeeze higher rates out of other, smaller clients.

Conclusion

A couple of challenges could weigh on LabCorp shares. First, high unemployment rates tend to pressure testing volumes because fewer patients are covered by insurance and companies order fewer employee drug tests. Second, Medicare payments are slated to fall 2% in 2010, and health-care reform could impose deeper rate cuts. At the same time, a mandatory insurance system would probably make testing services available to more patients. Medicare accounts for about 12% of LabCorp’s revenue.

Consensus estimates, propelled by an increase in LabCorp’s profit guidance, anticipate profits will climb 6% to $4.89 per share this year and jump 11% next year. At 15 times trailing earnings, LabCorp trades 9% below the three-year average P/E ratio. If the 2010 consensus estimate proves accurate, a return to the three-year average valuation would equate to a stock price of $92 at the end of next year. An annual report for Laboratory Corp. of America Holdings is available at 358 S. Main St., Burlington, NC 27215; (336) 229-1127; www.labcorp.com.

LABORATORY CORP. OF AMERICA
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Sep '09 $1.22 vs. $1.10 + 4% $71.29 -

$62.06

15 - 13
Jun '09 1.30 vs. 1.24 + 4% 68.09 - 57.08 15 - 12
Mar '09 1.22 vs. 1.14 + 5% 65.90 - 53.25 14 - 12
Dec '08 1.10 vs.

1.04

+ 12% 71.27 - 52.93 16 - 12
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $4.51 $4.58 $0.00 $80.77
-
$52.93 18 - 12
2007 $4.07 $4.18 $0.00 82.32
-
65.13 20 - 16
2006 $3.59 $3.32 $0.00 74.30
-
52.58 22 - 16
2005 $3.33 $2.80 $0.00 55.00
-
44.63 20 - 16
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
94 75 77 95 74 75 46

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


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com