Will LabCorp (LH) Surprise Earnings Estimates this Season? - Analyst Blog

Laboratory Corp. of America Holdings ( LH ), or LabCorp, is scheduled to release its fourth-quarter and full year 2014 results before the opening bell on Feb 20. Last quarter, LabCorp had posted a positive earnings surprise of 2.98%. However, the trailing four-quarter average earnings surprise is pegged at a negative of 0.60%. Let's see how things are shaping up for this announcement.

Factors at Play

While LabCorp expects the impending acquisition of drug development major Covance (expected to close any time after Feb 18 stockholder's meeting) to not have any material impact on the company's fourth quarter financial results, it projects healthy operating performance and results for the fourth quarter.

Over the past several quarters, the challenging volume environment for testing laboratories and utilization weaknesses have posed looming headwinds for LabCorp. However, the company expects this scenario to improve in the fourth quarter.

During its third quarter earnings release, LabCorp had raised its full-year 2014 revenue growth guidance to 3% over 2013 from 2% announced earlier. EPS guidance was also revised to the range of $6.70 to $6.80, up from the earlier projection of $6.50 to $6.75. The raised guidance reflects the company's confidence in reporting strong fourth-quarter results this year.

Meanwhile, LabCorp is leaving no stone unturned to consolidate operations and realize potential synergies. As part of its 5-pillar strategy, LabCorp is currently working hard on innovations in association with academic institutions to capture the growing lab testing market with its advanced assays and tools. Despite near-term challenges due to reimbursement issues, the company is focused on portfolio expansion to drive its top line. LabCorp is emphasizing particularly on the high-margin esoteric testing business, which is expected to contribute 45% of total sales in the next 3-5 years.

Moreover, optimism prevails among investors regarding the impending acquisition of Covance, as is evident from the positive momentum experienced by the company's stock ever since the news was made public. LabCorp expects this acquisition to create a market leader in both laboratory testing and CRO spaces. The new company is expected to derive approximately 20% of revenues from outside the U.S.

Besides, the new combined entity will allow management to make an increased investment in innovation. Per estimation, combined revenue growth from a broader platform, increased scale, synergies, and strategic deployment of cash flow will create significant long-term shareholder value.

We are however concerned about the Medicare payment cuts and the implementation of sequestration. Margins continue to be under pressure.

Earnings Whispers?

Our proven model does not conclusively show that LabCorp is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: LabCorp's earnings ESP is 0.00%, since the Most Accurate estimate as well as the Zacks Consensus Estimate are pegged at $1.63.

Zacks Rank: LabCorp has a Zacks Rank #2 (Buy) which increases the predictive power of ESP. However, a 0.00% ESP makes surprise prediction difficult.

Note that we caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

The Kroger Co. ( KR ) has an earnings ESP of +4.49% and a Zacks Rank #2. The company is expected to report fourth-quarter earnings on Mar 5.

bluebird bio, Inc. ( BLUE ) has an earnings ESP of +9.68% and a Zacks Rank #2. The company is expected to post fourth-quarter 2014 earnings on Mar 4.

ZELTIQ Aesthetics, Inc. ( ZLTQ ) has an earnings ESP of +166.67% and a Zacks Rank #2. The company will be reporting its fourth-quarter earnings on Mar 3.

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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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