Here's Why Investors Should Retain LabCorp (LH) Stock for Now

Laboratory Corporation of America Holdings, or LabCorp LH, is gaining from strength in its Drug Development business. The company’s strong fourth-quarter performance instils optimism. However, stiff competition and foreign-exchange headwinds do not bode well.

In the past year, the Zacks Rank #3 (Hold) stock has lost 19.3% compared with a 7.9% plunge of the industry and 11% fall of S&P 500.

The renowned healthcare diagnostics company has a market capitalization of $19.69 billion. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed once, delivering a surprise of 2.86%, on average.

Let’s delve deeper.

Factors At Play

Q4 Upsides:  LabCorp ended the fourth quarter of 2022 with better-than-expected earnings. The base business remains strong. Excluding COVID testing revenues, enterprise-based business revenues grew 6% at constant exchange rate or CER.

Growth in diagnostics-based business revenues was strong due to both routine and esoteric testing and revenues from the Ascension partnership. Looking forward, the Diagnostic business is expected to accelerate banking on 10.5% to 12.5% base business growth, benefiting by around 5 percentage points with a full year of Ascension partnership.

Targeted Development in High-Growth Area: In its efforts to expand further, LabCorp is focusing more on high-growth opportunity areas such as neurodegenerative, autoimmune and liver disease as well as cell and gene therapy. In 2022, the team supported over 5,000 clinical trials, worked on over 90% of new FDA approvals and launched over 130 new tests.

Zacks Investment ResearchImage Source: Zacks Investment Research

In the area of neurodegenerative disease, the company launched new tests to assist the diagnosis and treatment of Alzheimer's, multiple sclerosis and Parkinson's disease. LabCorp earlier launched the Neurofilament Light Chain blood test to facilitate the detection and verification of the signs of neurodegenerative disease. This widely accessible test provides direct evidence of neurodegeneration and neuronal injury.

Covance Drug Development Growth Continues: This business is benefiting from collaborations with leading pharmaceutical and biotechnology companies with whom it started to work on potential antivirals, treatments and vaccines.

In 2022, the company enhanced its central laboratory presence and drug development capabilities in Japan by expanding CB Trial Laboratory. This central laboratory is co-managed by LabCorp Drug Development and a renowned Japan-based clinical laboratory testing services provider, BML. Under the collaboration, LabCorp and BML will start working on a new laboratory facility in Kawagoe, Saitama, extending capacity and services for pharmaceutical and biotechnology clients.

The company also completed a comprehensive laboratory relationship with Ascension to manage Ascension’s hospital-based laboratories in 10 states and purchase select assets of the health system’s outreach laboratory business.

Downsides

Exposed to Currency Headwind: With LabCorp deriving a huge share of its revenues internationally, it remains highly exposed to currency fluctuations. Unfavorable currency movements have been a major dampener over the last few quarters, as in the case of other important MedTech players too. Revenues in the fourth quarter of 2022 registered a 1.3% decline due to adverse foreign-currency translation.

Competitive Landscape: LabCorp faces intense competition from its major competitor, Quest Diagnostics, and other commercial laboratories and hospitals. In a $55 billion U.S. lab market, hospitals control an estimated 55% of the diagnostic test market compared with LabCorp’s 10% share.

While pricing is an important factor in choosing a testing lab, hospital-affiliated physicians expect a high level of service, including accurate and rapid turnaround of testing results. As a result, LabCorp and other commercial labs compete with hospital-affiliated labs primarily on the basis of quality of service.

Estimate Trend

In the past 90 days, the Zacks Consensus Estimate for LabCorp’s 2023 earnings has moved down by 2.9% to $17.18 per share.

The Zacks Consensus Estimate for 2023 revenues is pegged at $15.19 billion, suggesting a 2.1% rise from the 2022 comparable figure.

Key Picks

Few top-ranked stocks in the overall healthcare sector include Haemonetics Corporation HAE, TerrAscend Corp. TRSSF and Akerna Corp. KERN. While both Haemonetics and TerrAscend sport a Zacks Rank #1 (Strong Buy), Akerna carries a Zack Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Haemonetics has risen 42.1% in the past year. The Zacks Consensus Estimate for 2023 and 2024 earnings per share have increased to $2.91 and $3.28 from $2.87 and $3.02, respectively, in the past 30 days.

HAE’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, delivering an average surprise of 10.98%. The company reported an earnings surprise of 7.59%, in the previous quarter.

Estimates for TerrAscend in 2023 have remained constant at a loss of 10 cents per share in the past 30 days. Shares of TerrAscend have declined 70.6% in the past year.

TerrAscend’s earnings beat the Zacks Consensus Estimate in one of the last three quarters and missed twice, the average negative surprise being 136.11%. In the last reported quarter, TRSSF delivered an earnings surprise of 216.67%.

Akerna’s has declined 95.7% in the past year. The Zacks Consensus Estimate for 2023 has remained constant at a loss of $1.91 per share over the past 30 days.

Akerna’s earnings missed the Zacks Consensus Estimate in each of the last four quarters, delivering a negative earnings surprise of 15.49%, on average. In the last reported quarter, KERN delivered a negative earnings surprise of 13.33%.

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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 Nasdaq, Inc.

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