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Why Is LabCorp (LH) Down 2.7% Since Last Earnings Report?

A month has gone by since the last earnings report for LabCorp (LH). Shares have lost about 2.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is LabCorp due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

LabCorp Q1 Earnings Miss Estimates, Margins Decline

Laboratory Corporation of America or LabCorp reported first-quarter 2023 adjusted earnings per share of $3.82, down 37.5% from the year-ago quarter’s figure. The adjusted figure excludes the impact of certain amortization expenses, restructuring charges, among others. The bottom line also missed the Zacks Consensus Estimate by 4.3%.

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On a GAAP basis, net earnings in the first quarter were $2.39 per share, significantly down from the year-ago figure of $5.23.

Revenues

Revenues in the quarter under review fell 3.1% year over year to $3.78 billion. The metric surpassed the Zacks Consensus Estimate by 0.9%.

The decline in revenues can be attributed to a 3.6% fall in organic revenues and a 0.7% negative impact from foreign currency translation. The downside was partially offset by a 1.2% growth from acquisitions net of divestitures. The drop

in organic revenues was due to a 11.6% fall in contribution from COVID-19 PCR and antibody testing (COVID-19 testing). However, this decline in COVID-19 testing was partially offset by a 7.9% rise in the company's organic Base Business (business operation excluding the company’s COVID-19 testing).

Segments in Detail

For the first quarter, LabCorp Diagnostics reported revenues of $2.38 billion, reflecting a 2.9% fall year over year. On an organic basis, revenues were down 4.7%, partially offset by acquisitions growth of 2%. This decline in organic revenues resulted from a 18.4% drop in contribution from COVID-19 Testing, partially offset by a 13.7% rise in Base Business. There was a 0.3% negative impact from foreign currency translation.

The company witnessed 3.3% fall in total volume (measured by requisition) on a 5.6% decline in organic volume and acquisition volume growth of 2.3%. Organic volume was primarily hampered by a 12.7% drop in COVID-19 testing, partially offset by a 7.1% rise in Base Business.

Drug Development revenues fell 4% to $1.40 billion in the first quarter due to a 1.5% negative impact from foreign currency translation. There was 0.1% decline from acquisitions.

Margins

Gross margin contracted 582 basis points (bps) to 25.8% in the first quarter.

Adjusted operating income declined 45.2% year over year to $421.1million. Adjusted operating margin contracted 857 bps from the year-ago quarter to 11.1%.

Cash Position

LabCorp exited the first quarter of 2023 with cash and cash equivalents of $393.9 million compared with $430 million at the end of fourth quarter 2022.

Cumulative cash flow from operating activities at the end of the first quarter was $121.2 million, significantly down from $356 million a year ago. Cumulative free cash flow at the end of the quarter under review was $27.3 million, down from $238.88 million a year ago.

2023 View

The company updated its 2023 guidance.

Total LabCorp Enterprise revenues (net of intersegment transaction eliminations, including Drug Development COVID-19 testing revenues) are expected to grow in the range of 1.5-4% (previous guidance was 1-4%). Base Business growth is expected in the range of 9.5-11% (previous guidance was 8.5-10.5%). COVID-19 testing revenues are expected to decline in the range of 80-90% (previous guided range was 75-90%).

Total Diagnostics revenues are expected to be down 0.5% to up 2% compared with the earlier guidance of down 2% to up 1.5%. Total Drug Development revenues are now expected to rise in the range of 3.5-5.5% in 2023 (down from the earlier guidance of 5-7%).

The Zacks Consensus Estimate for full-year revenues is pegged at $15.18 billion.

The company expects full-year adjusted EPS in the band of $16.25-$17.75 (previous range was 16-18%). The Zacks Consensus Estimate for the metric is pegged at $17.18.

The company projects 2023 free cash flow figure in the range of $1-$1.2 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, LabCorp has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, LabCorp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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