On Jul 25, 2014, we issued an updated research report on Laboratory Corporation of America Holdings (LH), a leading independent clinical laboratory company. LabCorp posted a sequentially improved and better-than-expected second quarter securing both top and bottom-line beats. The company is working on portfolio expansion and is focusing further on the high-margin esoteric testing business to drive its top line.

LabCorp reported second-quarter adjusted earnings per share of $1.84, up 2.2% year over year and ahead of the Zacks Consensus Estimate of $1.77. Revenues increased 3.3% to $1,516.4 million beating the Zacks Consensus Estimate of $1,504 million.Significant increase in test volume acted as the main impetus behind the company’s top-line improvement.

Despite the near-term challenges from reimbursement issues, the company is working on portfolio expansion to improve its top line. The company is focusing further on the high-margin esoteric testing business, which is expected to contribute 45% of total sales in the next 3–5 years.

As part of its five-pillar strategy, LabCorp is currently working hard on new innovations with academic institutions in order to capture the growing lab testing market with its advanced assays and tools. Recently, LabCorp entered into the substantial BRCA testing market which comprises a suite of tests for the assessment of breast cancer risk. Given the continuous focus on portfolio expansion, we are confident of the company garnering higher revenues from specialized testing, going forward.

The current economic uncertainty affects physician office visits, which in turn reduces volumes at LabCorp. The company witnessed a 5.3% increase in testing volume (measured by requisitions and fold-in acquisitions) which was partially offset by a mix. On the other hand, the company reported poor revenue per requisition (down 2.0% year over year) that reflects Medicare payment reductions and an unfavorable test mix.

This low growth rate was primarily due to a challenging volume environment for testing laboratories and utilization weaknesses across the healthcare sector. Low level of employment and slow growth of commercially insured lives will continue to affect the company’s overall growth until the economy rebounds. With the company’s 2014 revenue growth guidance of 2%, we expect this low organic growth environment to continue.

LabCorp currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Other top-ranked medical stocks worth a look include Align Technology Inc. (ALGN), Sirona Dental Systems Inc. (SIRO) and McKesson Corp (MCK). All the three stocks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on LH
Read the Full Research Report on ALGN
Read the Full Research Report on MCK
Read the Full Research Report on SIRO


Zacks Investment Research