Lab Stocks: Baird Favors Laboratory Corp., Says Quest Diagnostics Is The Simple Choice

Laboratory Corp. of America Holdings LH shares have gained about 7 percent year-to-date period versus Quest Diagnostics Inc DGX's 2.3-percent advance.

At least one analyst thinks it's worth plowing fresh money into LabCorp rather than Quest, although they aren't interested in swapping one equity for the other.

The Analyst

Baird analyst Eric Coldwell assumed coverage of both LabCorp and Quest with Outperform ratings.

Baird raised its price target for LabCorp from $183 to $203. The price target for Quest was raised from $106 to $115.

The Thesis

"Relative to much of health care, labs are high-value, stable businesses with fewer political, legislative and perception risks," Coldwell said in a Tuesday note. 

Two of the sector's three primary challenges — the Protecting Access To Medicare Act and commercial rate pressure — are already reflected in the stocks' valuation and estimates, the analyst said.

LabCorp shares have also discounted the most likely outcome from the UnitedHealth Group Inc UNH and Aetna Inc AET renewals, he said. 

Although the lab market isn't overwhelming, the analyst projects that LabCorp and Quest will benefit from market expansion, market penetration, market share capture and consolidation. Labs ares "valuable partners" for the entire health care supply chain, Coldwell said. 

LabCorp's CRO Edge 

One differentiator between LabCorp and Quest is LabCorp's contract research organization, strategy, the Baird analyst said. 

The CRO space is gaining momentum, and Baird's sum-of-the-parts analysis suggests that LabCorp is undervalued compared to Quest, Coldwell said. 

"While we see it as Average Risk, we perceive LH risks as higher than DGX, with all that CRO entails and depending on the UNH outcome." 

Quest: A Simple Investment 

Baird views Quest as the right investment for the "keep it simple, stupid" investor; income seekers, due to its 2-percent dividend yield; and longer-term investorswho are cognizant of the likely benefits in 2019 from a potential opening up of UnitedHealth's network or American Clinical Laboratory Association succeeding in its PAMA lawsuit.

Price Action

LabCorp shares were up marginally at $170.88 at the close Tuesday, while Quest was up 1.25 percent at $102.47. 

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