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LabCorp Earnings Misses Again - Analyst Blog

Posted
4/19/2013 11:14:00 AM
By: Zacks.com
Referenced Stocks:BMY;CYBX;DGX;LH

Laboratory Corporation of America Holdings ' ( LH ) first-quarter 2013 adjusted earnings per share of $1.74 remained flat on a year-over-year basis but missed the Zacks Consensus Estimate of $1.77. However, the results include an adverse impact of 4 cents due to inclement weather.

On a reported basis, after including amortization, restructuring and other special charges LabCorp's net earnings of $147.2 million or $1.56 per share in the first quarter of 2013 were lower than net earnings of $161.6 million or $1.63 per share in the year-ago quarter.

Quarter Under Review

Revenues inched up 1.2% year over year to $1,440.9 million in the first quarter, trailing the Zacks Consensus Estimate of $1,448 million. The low volume growth environment is reflected in a mere 1.1% increase in testing volume (measured by requisitions), while revenue per requisition clambered 0.2%. Like its peer Quest Diagnostics ' ( DGX ) first-quarter results, LabCorp's results were also affected by overall soft industry trends.  

Adding to LabCorp's woes, adverse weather reduced volume growth by roughly 0.5% in the quarter. On a per day basis, revenues improved 2.9% and testing volume increased 2.7% in the quarter.

Gross margin declined 80 basis points (bps) to 39.7% in the quarter. Adjusted operating income declined 5.2% year over year to $289.0 million in the reported quarter, resulting in an operating margin of 20.1%, lower by 130 bps from the year-ago quarter. Lower gross margin along with a 4.4% rise in selling, general and administrative expenses led to a drop in operating margin.

LabCorp exited the quarter with cash and short-term investments of $185.8 million compared with $466.8 million at the end of 2012. The company had $30.0 million borrowings outstanding under the $1.0 billion revolving credit facility. Operating cash flow in the quarter was $198.2 million, up 0.6% year over year.

During the quarter, LabCorp repurchased 1.3 million shares for $113.9 million and was left with $954.1 million of authorization under the approved share repurchase plan. A consistent share buyback program led to a 4.6% decline in the outstanding share count and thereby had a positive effect on earnings per share.

Outlook

LabCorp maintains its guidance for 2013. The company envisages revenue growth in the range of 2%-3%. The Zacks Consensus Estimate of $5,776 million reflects annual growth of 1.8%. It forecasts adjusted earnings per share in the band of $6.85 and $7.15 (including an adverse impact of 35 cents due to Medicare payment reductions).

The projection does not take into account the positive impact of any share repurchase activity for 2013. The current Zacks Consensus Estimate of $7.15 is line with the higher end of the guidance range.

In addition, guidance for operating cash flow and capital expenditure lies in the range of $870 million to $900 million and $200 million to $220 million, respectively.

Our Take

LabCorp posted another challenging quarter, a reflection that challenging volume environment for testing laboratories and utilization weaknesses are looming headwinds. Although the share repurchase activity provided some cushion for the company, the bottom-line results failed to boost confidence.

Nonetheless, LabCorp is continuously working on portfolio expansion to drive top line. The company's long-term alliance with Bristol-Myers Squibb Company ( BMY ) is another potential upside. While LabCorp's focus on pipeline development is likely to yield positive results, its progress to fuel growth has been slow.

In light of these facts and the market overview, we remain on the sidelines for LabCorp. Accordingly, the stock carries a Zacks Rank #3 (Hold).  

While we tread with caution for LabCorp, other healthcare stocks such as Cyberonics Inc. ( CYBX ), carrying a Zacks Rank #1 (Strong Buy) are worth considering.



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