* All data are as of the close of Tuesday, April 7, 2015. Emphasis is on company fundamentals and financial data rather than on commentary.
Are you busy conducting research on your latest stocks to add to your portfolio? Why not research some researchers? Medical Laboratories & Research companies, that is.
With the growing number of Americans signing on for health insurance since the Patient Protection and Affordable Care Act (PPACA) made health plans mandatory for most people at the start of 2014 has come a growing number of medical visitations, resulting in an increase in demand for medical testing and other diagnostic services.
This has been a boon for the Medical Laboratories & Research industry, which offers a range of medical lab services including blood testing, disease testing, and genetic testing, and in some cases even environmental lab services such as the testing of air- or waterborne organisms, infections and diseases. Many of these companies also play a vital role in assisting biotechnology companies test their new drugs during various phases of their trials.
Having already compared America's 3 Largest Medical Laboratories & Research Companies, Thermo Fisher Scientific (NYSE: TMO), Agilent Technologies (NYSE: A), and Quest Diagnostics (NYSE: DGX), we'll now look at the next 3 largest U.S. companies in the industry: Laboratory Corp. of America Holdings (NYSE: LH), Quintiles Transnational Holdings Inc. (NYSE: Q), and PerkinElmer Inc. (NYSE: PKI).
Note that LH has recently overtaken DGX as the 3rd largest U.S. company in the industry, bumping DGX down to 4th place. But in the interest of continuity, I'll keep LH together with Q and PKI as today's three underdogs, which are making rapid progress as they bite on the heels of the previous three leaders, as LH's leap into 3rd place attests.
Even before health plans became mandatory at the start of 2014, the six largest U.S. companies in the industry have been enjoying strong stock appreciation since early 2013, as graphed below.
Since May 9, 2013 (selected as the start date given the public debut of the youngest of the six largest U.S. companies in the space, Quintiles Transnational Holding), where the broader market S&P 500 index [black] has gained 27%, all six of our featured companies have beaten the benchmark in the following order:
• largest TMO [orange] with gains of 60%,
• 5th largest Q [blue] with gains of 57%,
• 6th largest PKI [purple] with gains of 57%,
• 2nd largest A [yellow] with gains of 38%,
• 3rd largest LH [beige] with gains of 34%, and
• 4th largest DGX [gray] with gains of 28%.
Notice where today's three underdogs are in the rankings? They rank 2nd, 3rd and 5th of the six companies. It's another revenge of the underdogs in action.
Our three underdogs have enjoyed more momentum over the past six months since the last steep correction of Q3 2014, as graphed below.
Where the S&P has gained 11.5% since then, all six of America's largest companies in the space have once again beaten the market - this time with our three underdogs ranking even better as the 2nd, 3rd and 4th best performers with gains ranging from 26% to 27%.
But will the future of these companies be as bright as their recent past? By the look of their future earnings growth estimates, they certainly promise to.
For the Medical Laboratories & Research industry as a whole, earnings growth is expected to outperform the broader market for years to come, as tabled below where green indicates outperformance while yellow denotes underperformance relative to the broader market.
During the current and next quarters, the industry's earnings are expected to outgrow the S&P's earnings growth at some 3.91 to 4.18 times its rate, before reducing to a slower but still envious 2.09 times annually over the next five years.
Zooming-in a little closer, our six largest U.S. companies in the space are seen breaking off into multiple directions, as tabled below. It's cherry picking within this group.
Over the current and next quarters combined, the top grower is expected to be DGX which was recently bumped down from 3rd largest to 4th, with its earnings expected to grow some 37%. Two of our three underdogs, Q and LH, are expected to put forth good showings in 2nd and 3rd place, with earnings growth of 21% and 18% respectively. Only one of the six companies is seen shrinking its earnings over the near term, namely 2nd largest Agilent with huge contractions totaling 92%.
Over the longer term, however, it's pretty much an even spacing within a very narrow range of 9.41% to 12.72% growth for the six companies, with 5th largest Q outperforming all as the top grower, followed by 2nd largest Agilent which manages to turn its ship around rather dramatically as it climbs from worst grower to 2nd best grower. Across this period, one underdog improves, one degrades, and the other remains the same, ranking as 1st, 4th and 5th best growers.
Over the nearer and longer terms combined, therefore, the underdog with the best earnings growth potential is 5th largest Q, promising the 2nd best growth of the six companies near term, and the best growth longer term.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Q delivered the greatest trailing revenue and earnings growth year-over-year, while PKI delivered the least, with negative earnings along with LH, denoting shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Q enjoyed the widest profit margins, LH operated with the widest operating margins, while PKI contended with the narrowest margins.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Q's management team delivered the greatest return on assets, while PKI's team delivered the smallest returns.
Since Q's return on equity is not available, the metric does not factor into the comparison. Though it is worth noting that LH's team achieved a greater return on equity than PKI's team.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, LH provides common stockholders with the greatest diluted earnings per share gain as a percentage of its current share price, while PKI's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, LH's stock is the cheapest relative to forward earnings and 5-year PEG. At the overpriced end of the scale, where Q's stock is the most expensive relative to earnings, PKI's is the costliest relative to PEG.
Since Q's price to company book value is not available, the metric does not factor into the comparison. Though it is worth noting that PKI's stock represents better value than LH's stock on this ratio.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, LH offers the highest percentage of earnings over current stock price for all time periods, while PKI offers the lowest percentage in the current quarter, and Q offers it beyond.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, LH offers the greatest growth in the current quarter, Q offers it next quarter and beyond, while PKI offers the slowest growth in all time periods.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe LH's stock offers the greatest upside potential and greatest downside risk, while PKI's offers the least upside and Q's offers the least downside.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Q is best recommended with 7 strong buys and 9 buys representing a combined 84.21% of its 19 analysts, followed by LH with 5 strong buy and 12 buy ratings representing a combined 70.83% of its 24 analysts, and lastly by PKI with 6 strong buy and 7 buy recommendations representing 65% of its 20 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… LH with the fullest cultured Petri dish, outperforming in 14 metrics and underperforming in 3 for a net score of +11, followed by Q not too far in the distance, outperforming in 12 metrics and underperforming in 7 for a net score of +5, with PKI needing to conduct some research into its financials, outperforming in 3 metrics and underperforming in 20 for a net score of -17.
Where the Medical Laboratories & Research industry is expected to outperform the S&P broader market substantially this and next quarters, and meaningfully next year and beyond, the next three U.S. companies in the space are expected to give the big boys in the industry a run for their money near term as Q, LH and PKI rank 2nd, 3rd and 5th best in earnings growth respectively, with just a little bit of tweaking longer term as they book the 1st, 4th and 5th best earnings growth rates over the next five years.
After taking all company fundamentals into consideration, Laboratory Corp. of America Holdings presents the most tried and tested financials, given its lowest stock price to forward earnings and 5-year PEG, widest operating margin, highest EBITDA over market cap and revenue, highest diluted earnings over stock price, highest future earnings over current stock price throughout, highest future earnings growth for the current quarter, best high and mean price targets, and greatest buy recommendation percentage - comfortably winning America's Next 3 Medical Laboratories & Research Companies competition.