LabCorp Beats, Ups EPS Guidance - Analyst Blog

Leading lab-testing company Laboratory Corporation of America Holdings (LH) reported better-than-expected third quarter fiscal 2010 results with an EPS of $1.34 compared to the year-ago quarter's $1.21 per share. 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 $1,276.5 million, ahead of the Zacks Consensus Estimate of $1,257 million. 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.

LabCorp exited the third quarter of fiscal 2010 with cash and short term investments of $96.9 million, lower than $148.5 million at the end of December 2009. The company had $65 million outstanding under its $500 million revolving credit facility. LabCorp continues its share buyback initiatives with a repurchase of around 1.5 million shares during the quarter for roughly $115.8 million.

Outlook

Subsequent to strong third quarter results, LabCorp updated its forecast for 2010. The company now expects a 5% growth in revenues, which is within the 4.5%-5.5% range announced earlier. On the contrary, LabCorp's prime competitor, Quest Diagnostics (DGX) yesterday, had announced a 1.5% decline in revenues for the fiscal compared to the earlier projection of a 1% decline.

Adjusted EPS target has been raised to $5.52-$5.57 from the previous guidance of $5.40-$5.55, excluding any share buybacks after September 30, 2010. LabCorp re-affirms its expectation of generating $870 million of operating cash flows (excluding transition payments) and spending $135 million toward capital expenditure. This guidance does not include any impact from the recent acquisition of Genzyme Genetics.

Recommendation

LabCorp continues to introduce innovative tests in the genomic/esoteric arena, specifically in the area of cancer, greater focus on managed care organizations and aggressively penetrate the hospital market. To expand its presence in the area of esoteric business, the company was looking for suitable acquisitions. In this respect, the recent acquisition of Genzyme Genetics is a smart move by the company. However, the current economic uncertainty continues to remain our major concern due to which the visits to physician's offices get delayed.

We currently have a Neutral recommendation on the stock.