LabCorp Thrives On Diet Of Small Rivals

7/19/2010


  Recent Price
$76
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
15
  Shares (millions)
107
  Long-Term Debt as % of Capital
29%
  52-Week Price Range
$83.00 - $62.06

Many companies that thrive on takeovers operate like sharks. But Laboratory Corp. of America ($76; LH) looks more like a whale that sustains itself on massive helpings of plankton and krill. For LabCorp, those tiny critters are independent clinical laboratories.

In the lab industry, consolidation is common. Fixed costs are high in the fractured and highly competitive market. Small labs have also been hurt by lower reimbursements from states and the federal government.

Appropriately, LabCorp itself sprung from a 1995 merger. Now the second-biggest predator in a sea of U.S. laboratories, LabCorp has posted higher per-share profits in each of the last 11 calendar years and 7% growth in the 12 months ended March.

LabCorp shares have risen 13% in the last 12 months, while shares of chief rival Quest Diagnostics ($51; DGX) fell 8%. The consensus projects double-digit profit growth for LabCorp in 2010 and 2011. The stock is a Buy and a Long-Term Buy.

Swimming with the tide

LabCorp handles the testing, diagnosis, and monitoring of illnesses. Revenue related to routine testing (60% of sales in the 12 months ended March) edged up 2% over the last year. To offset lower testing volumes, LabCorp has raised its prices for these exams. Revenue at LabCorp’s key growth business, genomic and esoteric testing (34% of sales), is up 7% over the last four quarters. More profitable than routine tests, genomic and esoteric tests diagnose infectious diseases, allergies, and cancers. A Canadian joint venture accounts for the remaining 6% of revenue. Medicare and Medicaid represent 18% of testing volume.

LabCorp generated $777 million in free cash flow over the last year, up 17%, but didn’t stash the money. Instead, it repurchased enough shares to lower the share count 2% and grazed on smaller labs. In May, LabCorp announced two acquisitions, one fished out of bankruptcy. The deals should combine to boost per-share earnings by about 2% and also increase market share in California to 15%

As part of health-care reform efforts, clinical labs agreed to a 1.75% cut in the Medicare fee schedule for five years starting in 2011. However, more than 30 million new U.S. patients will see increased access to preventive-care tests.

Conclusion

Labor-market weakness continues to pressure LabCorp’s testing volumes, already hurt by poor weather conditions in the March quarter and the loss of two large government contracts in the first half of 2009. Looking ahead, growth comparisons should become easier and pricing trends more favorable, while the higher profit margins of specialty testing should offset weaker volumes. LabCorp is slated to report June-quarter results July 22. Analysts expect per-share earnings to climb 11% on 4% higher revenue.

Despite their recent share-price momentum, LabCorp shares trade at 15 times trailing earnings, a 12% discount to the five-year average price/earnings ratio. 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

Mar '10 $1.30 vs. $1.22 + 3% $77.09 -

$69.49

16 - 14
Dec '09 1.16 vs. 1.10 + 3% 76.74 - 63.81 16 - 13
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
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $4.69 $4.89 $0.00 $76.74
-
$53.25 16 - 11
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
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
89 60 65 90 77 74 55

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


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