Laboratory Corporation of America Holdings (LH) is scheduled to release its fourth quarter and fiscal 2010 earnings on February 10, 2011, before the market opens. The company is expected to earn $1.31 during the quarter on revenues of $1.25 billion and $5.54 during the fiscal on revenues of $4.9 billion, according to the Zacks Consensus Estimate.
Previous Quarter Highlights
LabCorp reported an EPS of $1.34 in the third quarter compared to the year-ago quarter’s $1.21. However, adjusting for restructuring and other special charges, the EPS came in at $1.47, ahead of the Zacks Consensus Estimate of $1.40 and the year-ago quarter’s $1.22.
Revenues increased 7.7% year over year to $1.3 billion, in line with the Zacks Consensus Estimate. Both testing volume (measured by requisitions) and revenue per requisition increased 1.9% and 5.7%, respectively. The lingering impact of the termination of two major government contracts in 2009 contributed (1.4%) to the volume decline. Excluding this impact, volume would have increased 3.3% during the quarter.
Agreement of Analysts
Estimates for the fourth quarter have not witnessed any changes in the past 7 or 30 days. Almost maintaining the same trend for fiscal 2010, only 1 analyst has lowered his estimate in the past 30 days.
Pricing continues to remain very tough and competitive in the industry. However, after Quest Diagnostics (DGX) recording positive volume growth during the fourth quarter (after several quarters), we expect better volume growth from LabCorp. The situation remains challenging for diagnostic companies with reduced physician office visits resulting from the prevailing economic uncertainty that reduces the volume. With respect to pricing, we do not expect much change as no significant contract is coming up for renewal in the near future.
Moreover, LabCorp has been following an acquisitive route which should further drive its top line. Esoteric testing accounted for 36% of LabCorp’s revenues in 2009, which the company plans to increase to 40% in the next 3-5 years. The acquisition of Genzyme Genetics (December 2010) will enable LabCorp to achieve this target. Subsequently, the company will provide updated goals for esoteric testing business. Volume is also expected to witness some improvement with the inclusion of more providers in the Empire contract since August 2010.
We expect LabCorp to share some details regarding its acquisition plans for 2011. In the absence of lucrative deals, the company has been following share repurchase activities to strengthen its bottom line.
Magnitude of Estimate Revisions
The magnitude of revisions is moderate following the third quarter results. In the past 90 days, estimates for the quarter have gone down by a penny to $1.31. The same case stands for the fiscal 2011.
Going by past trends, we expect LabCorp to exceed estimates. Barring the first quarter of fiscal 2010, the company exceeded estimates in the past four quarters with a positive four-quarter average of 1.98%. This means that on an average, LabCorp has topped the Zacks Consensus Estimate by 1.98% over the last four quarters.
LabCorp continues to focus on strategic initiatives to drive growth and profitability. It includes introduction of innovative tests in the genomic/esoteric arena, specifically in the area of cancer, greater focus on managed care organizations in addition to aggressive penetration into the hospital market. The company is increasing its focus on the high margin esoteric testing business, which accounted for 36% of its revenue in 2009. In this field the acquisition of Genzyme Genetics is considered to be a smart strategic move by the company.
LabCorp has strong balance sheet based on which the company is looking forward to suitable acquisitions in the esoteric business and expanding its reach. However, the tough competitive landscape is of primary concern, especially in the current economic scenario.
We currently have a ‘Neutral’ recommendation on the stock which also corresponds to the Zacks #3 Rank (hold).