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Why Is LabCorp (LH) Down 7.9% Since Last Earnings Report?

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It has been about a month since the last earnings report for LabCorp (LH - Free Report) . Shares have lost about 7.9% 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.

Coronavirus Impact Dent LabCorp's Testing Volume in Q2

LabCorp reported second-quarter 2020 adjusted earnings per share (EPS) of $2.57, down 12.3% from the year-ago quarter. The adjusted figure that excludes the impact of CARES Act Emergency Funding was negatively impacted by the COVID-19 pandemic. However, the bottom line surpassed the Zacks Consensus Estimate of 78 cents.

On a reported basis, net earnings were $2.37 per share, a 22.8% improvement from the year-ago period.

Revenues in the quarter under review declined 3.9% year over year to $2.77 billion. However, it exceeded the Zacks Consensus Estimate by 14.3%.

The lower revenues can be attributed to 5.4% decline in organic revenues, 0.3% drop due to the disposition of a business and a 0.1% adverse impact from unfavorable foreign currency translation, partially offset by 1.9% growth from acquisitions.  Despite COVID-19 testing-related growth of 15.4%, the year-over-year decline in organic revenues was due to a significant 20.9% reduction in the company's organic Base Business due to the pandemic. The lower organic revenues could be attributed to a 0.5% adverse impact of lower Medicare and Medicaid pricing as a result of implementation of Protecting Access to Medicare Act (PAMA).

Quarter in Detail

LabCorp reports results under two operating segments — LabCorp Diagnostics and Covance Drug Development.

In the second quarter, LabCorp Diagnostics reported revenues of $1.69 billion, reflecting 3.9% decline year over year. On an organic basis, revenues declined 4.9%. This included a 30.1% negative impact from COVID-19 on organic Base Business, partially offset by 25.2% contribution from COVID-19 Testing. The decline of the organic Base Business includes a 0.8% negative impact from PAMA and a 1.2% reduction due to the September 2019 non-renewal of the BeaconLBS - UnitedHealthcare contract pertaining to the Florida market.

Organic revenue decline was partially offset by acquisitions-related growth of 1.1%.

The company witnessed a 19.5% decline in total volume (measured by requisition). Organic volume declined 20.7%,partially offset by acquisition volume growth of 1.2%.The organic volume decline was primarily due to a 35.3% negative impact from COVID-19 on Base Business, partially offset by 14.6% increase in demand for COVID-19 Testing.

Covance Drug Development revenues declined 2.9% to $1.09 billion in the second quarter affected by a 5.2% decline in organic revenues, a 0.7% impact owing to the disposition of the Covance Research Products business and 0.1% impact of adverse foreign currency translation. This was partially offset by a 3.1% contribution from acquisitions.

Margins

Gross margin contracted 116 basis points (bps) to 27.5% in the second quarter. Also, adjusted operating income declined 11.1% year over year to $364.2 million. Adjusted operating margin contracted 106 bps from the year-ago quarter to 13.2%.

Cash Position

LabCorp exited the second quarter with cash and cash equivalents of $557 million compared with $323.6 million at the end of the first quarter. Cumulative cash flow from operating activities at the end of the second quarter was $574.5 million, up from $419.3 million a year ago. Additionally, cumulative free cash flow at the end of the second quarter was $369.4 million, up from $239.9 million a year ago.

Earlier, the company had temporarily suspended its existing share repurchase program due to the pandemic.

2020 View

The company did not provide 2020 guidance as it is still unable to gauge the impact of the ongoing COVID-19 pandemic. However, overall, it noted that, while LabCorp's Base Business continues to be negatively impacted by the pandemic, the company's outlook has improved across the business.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 52.84% due to these changes.

VGM Scores

At this time, LabCorp has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. 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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