LabCorp (LH) Tops on Q2 Earnings and Revenues, Ups EPS View - Analyst Blog

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Laboratory Corporation of America Holdings ( LH ) reported a better-than-expected second-quarter 2014 with adjusted earnings per share (EPS) of $1.84, up 2.2% year over year. Results also steered ahead of the Zacks Consensus Estimate of $1.77. According to the company, gain of 6 cents per share on the sale of an investment as well as the company's share repurchase program boosted the bottom line.

On a reported basis, after including amortization (15 cents), restructuring and other special charges (5 cents), LabCorp's net earnings came in at $141.3 million or $1.64 per share against net earnings of $151.9 million or $1.62 per share in the year-ago quarter.

Laboratory Corporation Of America Holdings - Quarterly EPS (BNRI) | FindTheBest

Quarter under Review

Revenues were up 3.3% year over year to $1,516.4 million in the second quarter, beating the Zacks Consensus Estimate of $1,504 million.

The company witnessed a 5.3% increase in testing volume (measured by requisitions and fold-in acquisitions) which was partially offset by a mix. On the other hand, the company reported poor revenue per requisition (down 2.0% year over year) that reflects Medicare payment reductions and unfavorable test mix. We expect these challenges to also affect LabCorp's peer Quest Diagnostics ' ( DGX ) which is expected to release its second-quarter 2014 results on Jul 24.


Gross margin fell a huge 182 basis points (bps) to 37.5% in the quarter. Adjusted operating income declined 8.6% year over year to $270.7 million. This led to an adjusted operating margin of 17.9%, down 234 bps from the year-ago quarter. During the quarter under review, selling, general and administrative expenses shot up 6.1% to $297.9 million.

LabCorp exited the quarter with cash and short-term investments of $479.5 million compared with $404.0 million at the end of 2013. At quarter-end, the company had no borrowings outstanding under its $1.0 billion revolving credit facility. Operating cash flow for the quarter was $207.4 million, an improvement from the year-ago level of $137.6 million.

During the quarter, LabCorp repurchased stocks of $56.4 million bringing its year-to-date share repurchase up to $162.6 million and was left with $889.9 million of authorization under the approved share repurchase plan. A consistent share buyback program led to a 7.9% decline in the outstanding share count.

Outlook

Backed by an encouraging second quarter performance, LabCorp increased its full-year 2014 EPS guidance to the range of $6.50 to $6.75 from the earlier provided projection of $6.40 to $6.70. The current Zacks Consensus Estimate of $6.68 falls within the revised range.

However, LabCorp still maintains its feeble revenue guidance for 2014 at a mere 2%. The current Zacks Consensus Estimate for revenues is pegged at $5,910 million.

In addition, operating cash flow and capital expenditures are expected to remain in the band of $780−$820 million and $185−$205 million respectively (unchanged from the previous guidance).

Our Take

LabCorp posted a sequentially improved and better-than-expected second quarter with both top and bottom-line beats. Significant increase in test volume acted as the main impetus to the company's top-line improvement in the reported quarter.

However, the current economic uncertainty continues to adversely affect LabCorp. The volume environment still remains challenging for testing laboratories and utilization weaknesses stands as looming headwinds. We are also concerned about the Medicare payment reductions (effective Jan 2013), molecular pathology codes and the implementation of sequestration. In addition, margins also continue to remain under pressure.

However, share repurchase activity continues to remain strong providing significant cushion to the company's bottom line. Yet, the still sluggish revenue outlook for 2014 implies that the industry trend does not seem likely to improve in the near future.

However, LabCorp 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.

Zacks Rank

The stock currently carries a Zacks Rank #2 (Buy).  Some other well-placed stocks in the same sector are AmerisourceBergen Corporation ( ABC ) and The Cooper Companies Inc. ( COO ), both carrying the same Zacks Rank as LabCorp.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: EPS , DGX , ABC , LH , COO

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