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LabCorp (LH) Q3 Earnings Lag Estimates, Guidance Tweaked

Laboratory Corporation of America HoldingsLH , or LabCorp, reported third-quarter 2018 adjusted earnings per share (EPS) of $2.74, up 15.6% from the year-ago quarter. The bottom line, however, lagged the Zacks Consensus Estimate by 4.5%.

On a reported basis, LabCorp's net earnings came in at $3.10 per share as compared to $1.65 in the year-ago period.

Revenues for the third quarter increased 8% year over year to $2.83 billion. The year-over-year rise in revenues was owing to 6.5% growth from acquisitions, organic growth of 2.8%, partially offset by a 1.1% negative impact from the disposition of businesses and 30 basis points adverse impact of foreign currency translation. Revenue growth was also negatively impacted by approximately 50 basis points due to certain ransomware attack and Hurricane Florence during the quarter.

The top line missed the Zacks Consensus Estimate of $2.84 billion.

Quarter Under Review

LabCorp reports under two operating segments: LabCorp Diagnostics and Covance Drug Development.

In the third quarter, LabCorp Diagnostics reported revenues of $1.75 billion, a 0.2% drop year over year. While revenues increased fueled by tuck-in acquisitions, organic volume (measured by requisitions), this was offset by the negative impact from the disposition of businesses and the implementation of the Protecting Access to Medicare Act (PAMA). In addition, foreign currency translation reduced revenue by approximately 20 basis points.

Laboratory Corporation of America Holdings Price, Consensus and EPS Surprise

Laboratory Corporation of America Holdings Price, Consensus and EPS Surprise | Laboratory Corporation of America Holdings Quote

Notably, this disposition of businesses relates to the divestment of the company's Food Solutions business and the selloff of its UK-based forensic laboratory testing business (both in August, 2018).

Excluding the disposition of businesses, revenue for the quarter would have been $1.74 billion, an increase of 1.4% year over year.

Excluding the disposition of businesses, the company reported a 2% rise in total volume (measured by requisition) and a 0.4% decline in revenue per requisition in the concerning quarter.

Covance Drug Development reported a 24.7% rise in revenues to $867 million in the third quarter. This upside was primarily on the back of acquisitions, organic growth, partially offset by the adverse impact of foreign currency translation of nearly 50 basis points.

Gross margin deteriorated 202 bps to 27.9% in the reported quarter. Adjusted operating income was up 1.3% year over year to $408.1 million. However, adjusted operating margin contracted 96 bps from the year-ago quarter to 14.4%.

LabCorp exited the third quarter of 2018 with cash and cash equivalents of $892.6 million compared with $221.4 million at the end of the second quarter. Year-to-date operating cash flow was $819 million, down 12.2% from $933.1 million in the year-ago period. Free cash flow came in at $561.4 million in this period, down 21.6% from the year-ago period.

During the quarter under discussion, the company returned $150 million to shareholders via share repurchases. The company currently has $843.5 million of authorization remaining under its existing share repurchase program.

Outlook

LabCorp has restated its 2018 guidance.

Revenue growth is expected to remain in the band of 10.5-11% from 2017 (earlier projected band was 10.5-11.5%) including a likely improvement of 40 bps (from projection of 50 bps improvement earlier) from foreign currency translation. The Zacks Consensus Estimate for current-year revenues is pegged at $11.41 billion.

Adjusted EPS for 2018 has been reduced to a new range of $11.25 to $11.45 (earlier range was $11.35 to $11.65). The consensus mark of $11.52 for the metric exceeds the guided range.

Free cash flow has been lowered to a band of $975 million-$1.02 billion (earlier announced range was $1.1-$1.2 billion).

Our Take

LabCorp posted a dismal quarter with adjusted earnings and revenues both missing the respective Zacks Consensus Estimate. While increasing acquisitions and organic volume expansion positively contributed to LabCorp Diagnostics business in the quarter, the disposition of certain businesses and the implementation of the Protecting Access to Medicare Act (PAMA) dented growth.

Covance Drug Development, however, has reported sturdy growth. This uptrend was primarily owing to strategic acquisitions and robust organic growth. Nevertheless, adverse currency headwind impacted the top line. The 2018 guidance also fails to inspire us.

Zacks Rank & Key Picks

LabCorp has a Zacks Rank #4 (Sell).

A few top-ranked stocks in the broader medical space are Amedisys, Inc. AMED , Baxter International Inc BAX and Masimo Corp. MASI .

Amedisys is expected to release third-quarter 2018 results on Oct 29. The Zacks Consensus Estimate for adjusted EPS is 79 cents and for revenues $410.2 million. The stock carries a Zacks Rank of 1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Baxter is expected to release third-quarter 2018 results on Oct 31. The Zacks Consensus Estimate for the quarter's EPS is pegged at 74 cents and for revenues at $2.79 billion. The stock sports a Zacks Rank #2 (Buy).

Masimo Corporation is slated to release third-quarter 2018 results on Oct 31. The Zacks Consensus Estimate for EPS is pinned at 68 cents and for revenues at $206.3 million. The stock is a Zacks #2 Ranked player.

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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.


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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