Laboratory Corporation of America Holdings LH, or Labcorp, is well-poised to grow in the coming quarters, backed by its efforts to advance its leading position in high-growth strategic areas, especially specialty testing. The planned spin-off has resulted in two independent companies, each poised for strong, sustainable growth. In addition, Labcorp is on the way to realize the expected savings from the Launchpad initiative, buoying optimism.
However, the significant drop in COVID-19 testing revenues continues to hinder the company’s operational results. Increased competition from other players in the industry remains a concern.
In the past year, this Zacks Rank #3 (Hold) stock has decreased 10.8% against the 11.8% rise of the industry and a 15.5% increase of the S&P 500 composite.
The renowned healthcare diagnostics company has a market capitalization of $18.06 billion. In the trailing four quarters, the company delivered an average negative earnings surprise of 0.86%.
Let’s delve deeper.
Factors at Play
Targeted Development in High-Growth Areas: In its efforts to further expand, Labcorp is focusing more on primary areas, such as oncology, woman’s health, autoimmune disease and neurology. In addition, the company is well-positioned for long-term success in Cell & Gene Therapy, expanding into the consumer market and international growth through the specialty testing and biopharma business.
Labcorp remains at the forefront of driving better patient outcomes in oncology following the acquisition of Personal Genome Diagnostics Inc. (PGDx) in early 2022. In May 2023, the company teamed up with Forge Biologics for adeno-associated virus (AAV) gene therapy development and collaboration. In addition, the company is investing in innovation and technology that supports diagnostic and drug development testing across disease areas, including cancer, Alzheimer’s and other diseases.
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Spin-Off of the CDSS Business to Add More Value: In June 2023, Labcorp completed the planned spin-off of its wholly owned Clinical Development and Commercialization Services (“CDCS”) business. Fortrea now operates as a global contract research organization (CRO) providing Phase I-IV clinical trial management, market access and technology solutions to pharmaceutical and biotechnology organizations.
The resulting spin-off is expected to provide Labcorp with strengthened strategic flexibility and an operational focus to pursue specific market opportunities and better meet customer needs, focused capital structures and capital allocation strategies to drive innovation and growth, a more targeted investment opportunity for different investor bases and the ability to align its particular incentive compensation with its financial performance.
LaunchPad Initiative on Track: To enhance shareholder value, Labcorp previously implemented a new LaunchPad business process improvement initiative, targeting savings of $350 million over the next three years ending 2024. We are pleased to see that the company is on track to deliver its targeted cost savings. Earlier, LH was set to implement actions in the third quarter of 2023 to take out $25 million of annualized stranded costs throughout the enterprise as a result of the spin-off.
On the third-quarter earnings call, management hinted that it is on track to take out the cost by the end of the year. Moreover, at the recently hosted Investors Day, the company talked about a $100 million-$125 million reduction through Launchpad.
Lower COVID-19 Testing Sales & Supply Challenges: As the severity of the pandemic continues to weaken, Labcorp has been witnessing a significant decline in COVID-19 PCR testing volumes for some quarters. In the third quarter of 2023, testing revenues were down 87%. LH’s operations are also subject to the effects of macroeconomic factors in the United States and globally, such as significant economic fluctuations as a result of the disturbed geopolitical situation and inflation, all leading to an increase in the cost of goods and services.
Competitive Landscape: Labcorp faces intense competition from its major competitor, Quest Diagnostics, and other commercial laboratories and hospitals. With pricing being an important factor in choosing a testing lab, hospital-affiliated physicians expect a high level of service, including an accurate and rapid turnaround of testing results. As a result, Labcorp and other commercial labs compete with hospital-affiliated labs, primarily on the basis of the quality of service.
In the past 30 days, the Zacks Consensus Estimate for Labcorp’s 2023 earnings has moved south from $13.66 to $13.57.
The Zacks Consensus Estimate for 2023 revenues is pegged at $12.14 billion, suggesting an 18.4% drop from the 2022 comparable figure.
Some better-ranked stocks in the broader medical space are Haemonetics HAE, Insulet PODD and DexCom DXCM.
Haemonetics has an estimated earnings growth rate of 28.4% for fiscal 2024 compared with the industry’s 15.3%. HAE’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 16.1%. Its shares have decreased 0.9% compared with the industry’s 3.1% fall in the past year.
HAE carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Insulet, sporting a Zacks Rank #1 at present, has a long-term estimated earnings growth rate of 39.2% compared with the industry’s 11.7%. Shares of the company have decreased 35.7% compared with the industry’s 3.1% decline over the past year.
PODD’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 105.1%. In the last reported quarter, it delivered an average earnings surprise of 77.5%.
DexCom, carrying a Zacks Rank #2 at present, has an estimated long-term earnings growth rate of 33.6% compared with the industry’s 13.8%. Shares of DXCM have increased 0.4% against the industry’s 3.7% decline over the past year.
DXCM’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 36.4%. In the last reported quarter, it delivered an average earnings surprise of 47.1%.
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