3 Reasons Baird Downgraded Laboratory Corp Of America

Baird downgraded Laboratory Corp. of America Holdings LH to Neutral amid reports that the company in among the bidders for clinical trials firm Pharmaceutical Product Development Inc.

Analyst Whit Mayo put out the following three reasons for the downgrade:

• (1) “we're less convinced LH can grow EPS double-digits in 2017, which puts Street numbers a little at risk”;
• (2) “the stock is at our price target ($138), now selling above its one-, three- and five-year historical averages”;
• (3) “with LH in the mix for PPD, we don't see the deal as a catalyst, but rather meaningfully altering the risk/reward, leverage profile and risk for execution.”

The analyst noted the Street is expecting more growth from the company that seems to be “challenging” in the current scenario.

“Assuming the lab can grow around 5% (again), we'd guess the CRO would need to grow 15-20%, which seems challenging relative to recent performance, rework issues and achieved synergies,” Mayo wrote in a note.

On the rumored PPD deal, Mayo isn't sure over the happening of the transaction the deal due to the material increase in leverage required to finance the deal.

“Our guesstimate is the transaction would be ~15% accretive on a 100% cash, no stock offer, with PF leverage at 5.4x,” Mayo highlighted.

The analyst also expects investors may not support the deal as “we find more investors off-put vs. excited about the stock post-Covance.”

On the valuation front, the stock has recovered nicely after the third quarter miss and now sells effectively for 15x Mayo’s 2017 cash EPS estimate versus one-, three- and five-year averages of 14x, 14.5x and 13.9x, respectively.

“Assuming 14x on the lab and 20x on the CRO would only support a stock in the low $140,” Mayo added.

At last check, shares of LabCorp fell 6.5 percent to $128.73.