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LabCorp (LH) Beats Q3 Earnings Estimates, Raises Guidance

Laboratory Corporation of America Holdings LH or LabCorp reported third-quarter 2017 adjusted earnings per share (EPS) of $2.46, up 9.3% from the year-ago quarter. The quarter’s adjusted EPS also exceeded the Zacks Consensus Estimate by 3.4%. Simultaneous hurricanes in the reported quarter, adversely affected adjusted EPS by 9 cents approximately.

On a reported basis, LabCorp’s net earnings came in at $1.74 per share, a 1.8% increase year over year.

Net revenue for the third quarter increased 9.5% year over year to $2.59 billion. The increase in net revenues was due to growth from acquisitions of 6.9%, organic growth (net revenue growth less revenue from acquisitions for the first twelve months after the close of each acquisition) of 2.3%, and the benefit from foreign currency translation of approximately 30 basis points. However, this was partially offset by a 0.7% adverse impact of multiple hurricanes during the quarter.

 

Quarter under Review

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

In the reported quarter, LabCorp Diagnostics reported net revenue of $1.84 billion, up 9.9% year over year, fueled by price, mix, tuck-in acquisitions, organic volume (measured by requisitions excluding requisitions from acquisitions for the first 12 months after the close of each acquisition) and the benefit from foreign currency translation of approximately 20 basis points. The company reported 7.3% increase in total volume (measured by requisition) and a 2.4% increase in revenue per requisition in the quarter.

After several quarters of drag in sales, Covance Drug Development reported an 8.6% rise in net revenue to $761.1 million in the third quarter. This was primarily on the back of the acquisition of Chiltern, organic growth and the benefit from foreign currency translation of approximately 60 basis points.

Gross margin expanded 75 bps to 33.9% in the quarter. Adjusted operating income increased 7.6% year over year to $417.5 million. Adjusted operating margin contracted 28 bps from the year-ago quarter to 16.1% on a 16.2% rise in selling, general and administrative expenses to $465.3 million.

LabCorp exited the quarter with cash and cash equivalents of $409.3 million compared with $299.9 million at the end of the second quarter. Year-to-date operating cash flow was $895.4 million, up from $727 million in the year-ago period. Free cash flow came in at $678.6 million, up from $522.4 million in the year-ago period. During the quarter, the company returned $42.1 million to shareholders through share repurchases and currently has $444.7 million of authorization, remaining under its existing share repurchase plan.

Outlook

Based on a strong third-quarter show and considering a gradually improving foreign exchange scenario, the company increased its earlier provided 2017 outlook.

Net revenue growth is now expected to remain in the band of 8-8.5% year over year, ahead of the earlier range of 5-6.5%. This includes a 10 bps impact from an unfavorable foreign exchange headwind. The current Zacks Consensus Estimate for revenues is pegged at $10.13 billion.

Adjusted EPS guidance for 2017 has been narrowed to the range of $9.40−$9.60 (previous range: $9.30−$9.65). The current Zacks Consensus Estimate of $9.51 falls within the guided range.

Free cash flow expectation has been raised to a new band of $970−$1010 million (previous range: $925−$975 million) up 8–13% from the prior year.

Our Take

LabCorp’s third-quarter earnings topped the Zacks Consensus Estimate. Strong year-over-year increase in both earnings and revenues were encouraging too. LabCorp Diagnostics business was strong on improving price, mix, acquisition and favorable foreign exchange scenario.

Also after several quarters of dull performance, Covance Drug Development reported strong growth. This was primarily on the back of the acquisition of Chiltern, strong organic growth and favorable foreign currency translation. An increased guidance for 2017 boosts investors’ confidence indicating chances of this bullish trend to be maintained in the fourth quarter too.

We believe that with the integration of newer acquisitions, LabCorp is perfectly positioned to drive long-term profitable growth through a combination of world-class diagnostics, drug development expertise and knowledge services.

Zacks Rank & Other Key Picks

Currently, LabCorp has a Zacks Rank #2 (Buy).

A few other top-ranked stocks in the broader medical sector are PetMed Express, Inc. PETS, Abbott ABT and Intuitive Surgical, Inc. ISRG. Notably, PetMed sports a Zacks Rank #1 (Strong Buy), while both Abbott and Intuitive Surgical carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed reported EPS of 43 cents for the second quarter of fiscal 2018, up 79.2% from 24 cents, reported in the year-ago quarter. Also, gross margin expanded 548 bps year over year to 35.2% in the reported quarter.

Abbott reported third-quarter 2017 adjusted earnings from continuing operations of 66 cents per share, up 11.9% year over year. Also, third-quarter worldwide sales came in at $6.83 billion, up 28.8% year over year. 

Intuitive Surgical posted adjusted earnings of $2.77 per share in the third quarter of 2017, up 34.5% on a year-over-year basis. Also, revenues increased 18% year over year to $806.1 million.

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Laboratory Corporation of America Holdings (LH): Free Stock Analysis Report
 
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