Laboratory Corporation of America Holdings
' (
LH
) disappointing second quarter 2012 results, released on July 19,
prompted analysts to slash their estimates for the forthcoming
periods, pricing in the challenges currently at play in this
sector.
Second Quarter Highlights
LabCorp reported earnings per share ("EPS") of $1.56 in the
second quarter of fiscal 2012 compared with $1.20 in the year-ago
quarter. Restructuring charge aside, the company recorded expenses
related to acquisitions and loss on the disposal of one of its
European subsidiaries and one of its joint
ventures.
Adjusted EPS came in at $1.77 (excluding amortization,
restructuring and other special charges), a penny behind the Zacks
Consensus Estimate. Earnings, however, surpassed the previous
year's adjusted EPS of $1.64.
Revenues increased 1.4% year over year to $1,423.4 million,
marginally missing the Zacks Consensus Estimate of $1,440 million.
The low-volume-growth environment is reflected in flat testing
volume (measured by requisitions) while revenue per requisition
increased a nominal 1.5%.
LabCorp narrowed its guidance for fiscal 2012. The company
expects 2−3% revenue growth (previous guidance of 2−3.5%),
resulting in adjusted EPS of $6.80−$7.00 ($6.75−$7.05) in the
fiscal year.
In addition, guidance for operating cash flow and capital
expenditure remained unchanged at $950 million and $155 million,
respectively. Genzyme Genetics is expected to be slightly accretive
to 2012 earnings.
For a full coverage on the earnings, read:
LabCorp Misses, Narrows Guidance
Agreement of Analysts
With economic uncertainty taking a toll on the company's
performance, estimate revision trend is bearish for the next two
quarters as well as the fiscals ahead. Over the last 7 days, 11 of
the 17 analysts covering the stock have lowered their estimates for
the third quarter of 2012, with no revisions northward. The same
trend can be seen for the current fiscal year, with 12 downward
revisions. None of the analysts have raised their estimates.
A continuous decline in organic volume growth, lower utilization
trends and impending reimbursement cuts in 2013 are the major
headwinds for LabCorp. Consequently, the company reported flat
volume growth during the reported quarter with a 0.5% decline in
organic volume, a disappointment from 1% growth in the first
quarter.
The company also fared worse than its peer
Quest Diagnostics
(
DGX
), which clocked 0.7% organic volume growth. The decline was
primarily due to flattened Vitamin D test volume, which has been a
growth driver historically and continued weakness in the histology
category. We note that organic growth has been on a declining trend
over the past few quarters - 3% in first, 2% in second, 1.2% in the
third and 0.7% in the fourth quarter of fiscal 2011.
With no significant job growth in the economy or an increase in
commercially insured covered lives, the company's overall volume
growth will continue to languish until the economy rebounds. Given
the challenging scenario the company narrowed its growth outlook
for 2012.
The reimbursement scenario is also challenging with an impending
cut of approximately 5% in the clinical lab fee schedule beginning
January 1, 2013. Mandatory physician fee schedule will also witness
a 2% cut, effective January 1, 2013. LabCorp derives 12% and 2% of
its revenues from clinical lab fee schedule and physician fee
schedule, respectively.
Magnitude of Estimate Revisions
With the majority of analysts lowering their estimates for the
forthcoming period, the consensus estimate for the third quarter
dropped by a couple of cents to $1.75 in the past 7 days. The
consensus estimate for fiscal 2012 also witnessed a drop of 5 cents
to $6.95 over the last 7 days, indicative of market pessimism on
the back of sluggish macroeconomic trends.
Neutral on LabCorp
LabCorp reported a disappointing second quarter with both
revenues and adjusted EPS lagging the Zacks Consensus Estimates.
This was followed by an overall market pessimism with the analysts
scaling down expectations for the future. The low-volume-growth
environment is reflected in flat testing volume while revenue per
requisition increased 1.5%.
The current economic uncertainty continues to adversely affect
the company. The company is also exposed to the reduction in
clinical and physician lab fee schedule, effective January 2013. We
do not expect any significant improvement in the situation in near
future. The stock retains a Zacks #4 Rank (Sell) in the short
term.
Despite these challenges, the company is working on portfolio
expansion to drive its top line. The company is focusing more on
the high-margin esoteric testing business, which is expected to
contribute 45% of total sales in the next 3-5 years. LabCorp is
also paying due attention to IT initiatives to improve physician
and patient experience.
LabCorp continues to work closely with Managed Care
Organizations (MCOs) by providing value added capabilities and
services. We are impressed with the company extending its contract
with
WellPoint
(
WLP
) on a multi-year basis with stable pricing and exclusivity
retained in all of the key markets. The company is also engaged in
contract renewal discussions with
Humana
(
HUM
), due 2012 and
Cigna
(
CI
), due mid-2013.
Over the long term, we have a Neutral recommendation on
LabCorp.
About Earnings Estimate Scorecard
As a PhD from MIT, Len Zacks proved over 30 years ago that
earnings estimate revisions are the most powerful force impacting
stock prices. He turned this ground breaking discovery into two
of the most celebrating stock rating systems in use today. The
Zacks Rank for stock trading in a 1 to 3 month time horizon and
the Zacks Recommendation for long-term investing (6+ months).
These "Earnings Estimate Scorecard" articles help analyze the
important aspects of estimate revisions for each stock after
their quarterly earnings announcements. Learn more about earnings
estimates and our proven stock ratings at
http://www.zacks.com/education/
CIGNA CORP (CI): Free Stock Analysis Report
QUEST DIAGNOSTC (DGX): Free Stock Analysis
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HUMANA INC NEW (HUM): Free Stock Analysis
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LABORATORY CP (LH): Free Stock Analysis Report
WELLPOINT INC (WLP): Free Stock Analysis Report
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