(LH) Laboratory Corporation of America Holdings Earnings Scorecard

The announcement of Laboratory Corporation of America Holdings’ (LH) third quarter fiscal 2011 results, as on October 20, 2011, has led analysts to revise their estimates lower for the fourth quarter and fiscal 2011.

Third Quarter Highlights

LabCorp reported adjusted EPS of $1.61 (excluding amortization, restructuring and other special charges) for the third quarter of fiscal 2011. The result was higher than the Zacks Consensus Estimate of $1.60 and the previous year’s adjusted EPS of $1.58.

Revenues increased 10% year over year to $1,404.5 million, marginally missing the Zacks Consensus Estimate of $1,408 million. Testing volume (measured by requisitions) and revenue per requisition increased 2.1% and 7.8%, respectively.

LabCorp updated its guidance for fiscal 2011. The company now expects a 10.5?11% revenue growth (previous guidance of 9.5?11.5%) resulting in adjusted EPS of $6.28?$6.33 ($6.17?$6.32) in fiscal 2011. In addition, operating cash flow and capital expenditure are expected to be $900 million (excluding Hunter Labs settlement) and $150 million, respectively.

Agreement of Analysts

With volume continuing to remain under pressure, the majority of analysts have reduced their estimates for the upcoming quarter. Over the last 30 days, 10 of the 19 analysts covering the stock have lowered their estimates for the fourth quarter of fiscal 2011, with 2 revisions in the opposite direction. Maintaining the same trend, 9 analysts slashed their estimates with 4 upward revisions for fiscal year 2011, over the past 30 days.

Economic uncertainty has affected physician office visits, thereby impacting LabCorp’s volume. This is visible in the continuous decline in organic growth over the past few quarters (3% in first, 2% in second and 1.2% in the third quarter of fiscal 2011).

With no significant job growth in the economy or an increase in commercially insured covered lives, the company’s overall volume growth will continue to languish until the economy rebounds. Cautious volume trends have forced the analysts to revise their estimates lower.

UnitedHealthcare and LabCorp have recently extended their contract under which the latter will continue to be its sole national laboratory till 2018. While the company is satisfied with respect to retention of managed care contracts, particularly of Genzyme Genetics, the pressure seen on pricing will have an adverse effect on comparison over the next four quarters.

Moreover, the Horizon Blue Cross Blue Shield Contract in New Jersey expires at the end of 2011 and the company is working on its renewal. The next contract coming up for renewal, on a national level, is for Humana (HUM) in 2012.

The big renewal year for LabCorp is 2013, when contracts with WellPoint (WLP) and Cigna (CI) will come up for renewals. If any of these contracts is not renewed, the company’s operations will be affected.

LabCorp is quite well capitalized on the liquidity front. The company exited the third quarter of fiscal 2011 with cash and short-term investment of $85.8 million ($230.7 million at the end of 2010) and $463 million under the revolving line of credit. At the end of September 2011, the company’s debt level was $2 billion without any borrowings outstanding under the revolving credit facility.

The company has been using its cash balance to make strategic acquisitions as well as reward its shareholders through share repurchases.LabCorp noted that it is interested in acquisition in the field of pathology, including hematopathology. During the reported quarter, the company repurchased 1.8 million shares for $152 million and was left with $256.5 million of repurchase authorization.

Magnitude of Estimate Revisions

The magnitude of estimate revisions has been modest for the fourth quarter, in the past 30 days. Overall, the consensus estimate for the current quarter has gone down by 3 cents to $1.52 while the first-quarter estimate for fiscal 2012 also declined by the same magnitude to $1.68. The estimate for fiscal 2011 witnessed a decline of 5 cents to $6.27 over the last 30 days.

Recommendation

LabCorp has been reporting growth in testing volume as well as revenue per requisition over the past few quarters. This was possible because of acquisitions, rate increases, test mix shift and increase in test per requisition. The company is focusing more on the high-margin esoteric testing business, which is expected to contribute 45% of total sales in the next 3–5 years.

LabCorp is also paying due attention to IT initiatives to improve physician and patient experience. However, the company continues to experience pressure on volume in the given economic scenario and also stiff competition from players like Quest Diagnostics (DGX). During the most recent quarter, Quest recorded a 2.1% growth in revenue per requisition, while the 1.2% decline in clinical testing volume, came as a disappointment.

We currently have a Neutral recommendation on LabCorp, in line with Quest. Both stocks retain short term Zacks #3 ranks (Hold).

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/

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