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LabCorp (LH) Q3 Earnings Miss, Revenues in Line; Guides Up

Laboratory Corporation of America HoldingsLH or LabCorp reported third-quarter 2016 adjusted earnings per share (EPS) of $2.25, up 8.7% from the year-ago quarter. However, adjusted EPS lagged the Zacks Consensus Estimate by 5.1%.

On a reported basis, LabCorp's net earnings came in at $179.5 million or $1.71 per share compared with $154.7 million or $1.50 per share a year ago.

Net revenue for the third quarter increased 4.5% year over year to $2.37 billion and were in line with the Zacks Consensus Estimate. Strong organic volume growth and tuck-in acquisitions contributed to top-line growth. However, these positives were partially offset by adverse currency exchange movement to the tune of 50 basis points (bps). Organic revenue growth (excluding the currency impact) was 3.6%.

LABORATORY CP Price, Consensus and EPS Surprise

LABORATORY CP Price, Consensus and EPS Surprise | LABORATORY CP Quote

Quarter under Review

Currently, LabCorp reports under two operating segments: LabCorp Diagnostics (LabCorp's legacy business, except for its clinical trial services business, which is now part of Covance Drug Development; and includes the nutritional chemistry and food safety business, previously part of Covance), and Covance Drug Development (Covance's legacy business, except for its nutritional chemistry and food safety business, which is now part of LabCorp Diagnostics; and includes LabCorp's legacy clinical trial services business).

In the reported quarter, LabCorp Diagnostics reported net revenue of $1.67 billion, up 4.4% year over year, fueled by price, mix and tuck-in acquisitions, partially offset by 0.3% organic volume decline (measured by requisitions) and unfavorable foreign currency translation of 0.1%. The company reported 3% increase in total volume (measured by requisition) and a 4.2% increase in revenue per requisition in the quarter.

Covance Drug Development reported a 4.8% rise in net revenue to $701.1 million in the third quarter of 2016, driven by broad-based demand, partially offset by 150 bps negative impact due to foreign currency translation. At Constant Exchange Rate (CER) and excluding the impact of the expiration of the Sanofi site support agreement, net revenue increased 9.5% year over year on higher demand.

Gross margin fell 4 bps to 36% in the quarter. Adjusted operating income increased 2.3% year over year to $387.9 million. However, adjusted operating margin contracted 30 bps from the year-ago quarter to 16.1% on a 3.9% rise in selling, general and administrative expenses to $400.5 million.

LabCorp exited the third quarter with cash and cash equivalents of $567.6 million compared with $639.6 million at the end of the second quarter. Year-to-date operating cash flow was $727 million, up from an operating cash outflow of $597.8 million in the year-ago period. Free cash flow came in at $522.4 million, significantly up from free cash flow of $427.1 million in the year-ago period.

Outlook

LabCorp updated its 2016 financial outlook. With the acquisition of Sequenom, the net revenue growth expectation has been raised to a new range of 10%−11% over 2015 (from the earlier expectation of 9.5%−10.5%). This includes a 60 bps impact from unfavorable foreign exchange headwind (earlier expectation was 50 bps) resulting from the strengthening of the dollar. The current Zacks Consensus Estimate for revenues is pegged at $9.40 billion.

Adjusted EPS guidance for 2016 has also been narrowed to the range of $8.70−$8.90 (earlier $8.60−$8.95). The current Zacks Consensus Estimate of $8.80 falls at the mid-point of the guided range.

Free cash flow expectation has been lowered to a new band of $840−$880 million (up 17%-24% over the prior year) (prior guidance was $900−$950 million).

Our Take

LabCorp's consolidated third-quarter earnings failed to meet the Zacks Consensus Estimate while revenues were in line with the same. Unfavorable foreign exchange continues to remain as a major dampener to the company's overall results. This has been a poor quarter with respect to organic volume growth in LabCorp Diagnostics. However, revenue growth was noted in Covance Drug Development and operating leverage was achieved. We believe that with the integration of Covance, LabCorp is perfectly positioned to drive long-term profitable growth through a combination of world-class diagnostics, drug development expertise and knowledge services. Although the strengthening of the dollar continues to weigh on the company's year-over-year performance, the raised 2016 outlook is a firm indication that the scenario is going to rebound down the line.

Zacks Rank & Key Picks

LabCorp currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the medical space include GW Pharmaceuticals plc GWPH , Quidel Corp. QDEL and Baxter International Inc. BAX .

GW Pharmaceuticals sports a Zacks Rank #1 (Strong Buy), while Quidel and Baxter carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 70.3% year to date compared to the S&P 500's 4.85% over the same period. The company's four-quarter average earnings surprise is 41.7%.

Quidel rallied 23.8% in the past one year, higher than the S&P 500's 3.74%. Over the next five years, the stock is estimated to record an earnings growth rate of 20%, higher than the industry average of 15.1%.

Baxter's shares soared 28.86% year to date. Over the next five years, the stock is expected to see 12.3% earnings growth. It has a trailing four-quarter average earnings surprise of 30.55%.

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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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