) reported adjusted earnings per share (EPS) of 90 cents in the
first quarter of 2014. The results beat the year-ago figure by
20.0% but remained in line with the Zacks Consensus
Estimate. The year-over-year upside was driven by an improved
top line and strong margin. Including the impact of certain
one-time items, reported earnings in the quarter came in at 88
cents, registering a 2.5% beat over the year-ago figure.
Apart from the earnings miss, the narrowed 2014 guidance also
failed to boost market confidence. The company's share price
dropped 6.1% since the announcement of the first quarter results to
close at $82.63 yesterday.
Total revenue in the reported quarter grossed $666.2 million, up
5.0% year over year beating the Zacks Consensus Estimate of $646
million. Net revenue increased 6.9% from the year-ago quarter to
reach $620.1 million (favorable foreign exchange contributed 170
basis points to this growth rate).
Covance primarily derives its revenues from two segments, Early
Development and Late-Stage Development. During the reported
quarter, solid sales performance was seen in Late-Stage Development
backed by accelerated revenues in central laboratories and clinical
development. On the other hand, after several quarters of drag in
sales, the Early Development segment is gradually returning to a
positive growth trajectory. During the quarter, sequential growth
in clinical pharmacology, research products, and nutritional
chemistry was more than offset by the divestiture of the company's
Seattle genomics laboratory and seasonal declines in toxicology and
Net revenue from continuing operations in Early Development rose
5.3% year over year on a reported basis to $218.2 million in the
quarter. Despite a decline in discovery support and the impact of
the sale of the Seattle genomics laboratory, growth in clinical
pharmacology and toxicology boosted sales in this segment.
Early Development pro forma operating margin was 9.7%, flat year
Net revenue from Late-Stage Development climbed 7.8% year over
year to $401.8 million. This was driven by growth of 10.9% in
central laboratories and 5.7% in clinical development, which more
than offset a decline in market access services. Moreover, the
quarter received a 160 basis points favorable impact from foreign
Pro forma operating margin expanded 40 bps on a year-over-year
basis to 23.2%.
Gross margin contracted 7 bps to 35.1%. Adjusted operating
margin improved about 248 bps to 15.04% with a 25.8% rise in
adjusted operating income to $100.2 million.
Covance exited the quarter with cash and cash equivalents and
short-term investments of $660.1 million, down 9.5% year over year.
Operating cash outflow of $71 million and capital expenditure of
$35 million in second-quarter 2014 resulted in the free cash
outflow of $106 million.
Covance revised its guidance for 2014. It narrowed its revenue
growth expectation to the band of 6% to 9% from the earlier range
of 6% to 10%. According to the company, the midpoint of this
updated range implies high-single digit growth in Late-Stage
Development and mid-single digit growth in Early Development. This
expectation takes into account a headwind from the spin off of the
Seattle genomics laboratory.
The company also narrowed its full year adjusted earnings per
share to $3.70−$3.95 from the previous range of $3.65−$4.00.
Currently, the Zacks Consensus Estimate for 2014 EPS is pegged at
$3.82, well within the guided range. The Zacks Consensus Estimate
for revenues of $2.62 billion stands at the upper-end of the guided
Covance has managed to post a better-than-expected top line as
part of its first-quarter results owing to healthy growth across
both its segments. However, on a sequential basis, revenues
decreased $3 million due to the sale of the Seattle genomics lab
and the seasonally weak start of the year in Early Development,
which more than offset the sequential growth in Late-Stage
Late-Stage Development continues to grow steadily on the back of
strong central laboratories and the continued sturdy performance of
clinical development services. Over the past few quarters, Covance
had been suffering from sluggish Early-Stage research and
development spending by the biopharmaceutical industry, which
resulted in overcapacity in this segment. However, of late, the
company is showing signs of recovery with improvement in Early
Development performance owing to robust growth in clinical
pharmacology and a substantial increase in toxicology orders.
The stock presently carries a Zacks Rank #3 (Hold). Some of the
top-ranked medical services stocks worth a look are
Air Methods Corp.
BG Medicine, Inc.
), all with a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
AIR METHODS CRP (AIRM): Free Stock Analysis
BIOTELEMETRY (BEAT): Free Stock Analysis Report
BG MEDICINE INC (BGMD): Free Stock Analysis
COVANCE INC (CVD): Free Stock Analysis Report
To read this article on Zacks.com click here.