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LabCorp (LH) Q4 Earnings and Revenues Beat, Offers View

Zacks

Laboratory Corporation of America Holdings LH or LabCorp reported fourth-quarter 2016 adjusted earnings per share (EPS) of $2.15, up 8.6% from the year-ago quarter. The quarter’s adjusted EPS also exceeded the Zacks Consensus Estimate by 1.4%. On a reported basis, LabCorp’s net earnings came in at $1.75 per share compared with $1.07 a year ago.

Full-year 2016 adjusted EPS improved 11.6% from the previous year to $8.83, surpassing the Zacks Consensus Estimate of $8.79 billion.

Net revenue for the fourth quarter increased 6.3% year over year to $2.39 billion, surpassing the Zacks Consensus Estimate by 1.7%. Strong organic volume growth and acquisitions contributed to the top-line growth. However, these positives were partially offset by adverse currency exchange movement to the tune of 60 basis points (bps). Organic revenue growth (excluding the currency impact) was 4.3%.

Full-year net revenue was $9.44 billion, up 11.0% from the year-ago period and above the Zacks Consensus Estimate of $9.42 billion.


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 7.8% year over year, fueled by price, mix, tuck-in acquisitions and organic volume, partially offset by unfavorable foreign currency translation of 0.1%. The company reported 2.7% increase in total volume (measured by requisition) and a 5.2% increase in revenue per requisition in the quarter.

Covance Drug Development reported a 3.5% rise in net revenue to $715.6 million in the fourth quarter, driven by broad-based demand and favorable product mix, partially offset by 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 6.1% year over year on higher demand.

Gross margin improved 2 bps to 33% in the quarter. Adjusted operating income increased 14.2% year over year to $382 million. Adjusted operating margin expanded 110 bps from the year-ago quarter to 16% on a marginal 0.04% rise in selling, general and administrative expenses to $406 million.

LabCorp exited the year with cash and cash equivalents of $433.6 million compared with $716.4 million at the end of 2015. Full-year operating cash flow was $1.18 billion, up from $982.4 million in the year-ago period. Free cash flow came in at $897 million, significantly up from free cash flow of $726.6 million in the year-ago period.

Outlook

LabCorp provided its 2017 financial outlook. Net revenue growth expectations remain in the band of 4.5−6.5% year over year. This includes a 60 bps impact from unfavorable foreign exchange headwind resulting in constant currency revenue growth of 5.1% to 7.1%. The current Zacks Consensus Estimate for revenues is pegged at $9.89 billion.

Adjusted EPS guidance for 2017 has also been projected in the range of $9.35−$9.75. The current Zacks Consensus Estimate of $9.64 falls within the guided range.

Free cash flow expectation remains within $925−$975 million (up 3–9% from the prior year).

Our Take

LabCorp’s fourth-quarter earnings and revenues both exceeded the respective Zacks Consensus Estimate. While organic growth remained strong, unfavorable foreign exchange continues to be a major dampener to the company’s overall results. 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 & Key Picks

LabCorp currently has a Zacks Rank #3 (Hold). Better-ranked medical stocks include Glaukos Corporation GKOS, Cardiovascular Systems CSII and Neogen Corp. NEOG. Glaukos sports a Zacks Rank #1 (Strong Buy) while Cardiovascular Systems and Neogen carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Glaukos gained over 100% in the last one year compared with the S&P 500’s gain of 21.9%. The company has a stellar four-quarter average earnings surprise of over 100%.

Cardiovascular Systems surged over 100% in the last one year compared with the S&P 500. It has a four-quarter average earnings surprise of 67.8%.

Neogen gained 33.8% in the past one year, better than the S&P 500 mark. The stock has an impressive long-term earnings growth rate of 16.7% for the next five years compared with the industry average of 15.2%.

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