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Will LabCorp (LH) Beat Earnings Estimates in Q2?

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We expect Laboratory Corp. of America Holdings (LH - Free Report) , or LabCorp to beat expectations when it reports second-quarter 2016 results before the opening bell on Jul 27. Last quarter, the company had reported a positive earnings surprise of 3.06% with the four-quarter trailing average beat pegged at 1.38%. Let’s see how things are shaping up prior to this announcement.

Why a Likely Positive Surprise?

Our proven model shows that LabCorp is likely to beat earnings because it has the right combination of two key components.

Zacks ESP: LabCorp’s Earnings ESP is +0.87%, since the Most Accurate estimate stands at $2.31 while the Zacks Consensus Estimate is pegged lower at $2.29. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. 

Zacks Rank: LabCorp currently has a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement.

The combination of LabCorp’s Zacks Rank #2 and +0.87% ESP makes us reasonably confident of a positive earnings beat.

LABORATORY CP Price and EPS Surprise

LABORATORY CP Price and EPS Surprise | LABORATORY CP Quote

 

What's Driving the Better-than-Expected Earnings?

The last year was marked by LabCorp as one of solid growth, driven by the successful execution of the company’s three-pronged strategy viz. delivering world class diagnostics, bringing innovative medicines to patients faster, and changing the way of patient care. The company strongly anticipates 2016 to be no different and the first quarter itself bears testimony to that fact

In the second quarter as well, we expect to see LabCorp gain from organic growth by introducing new tests to its existing as well as new customers, channels and markets. In this regard we note the nationwide launch of Zika virus testing using the RealStar Zika Virus RT-PCR Kit U.S. from altona Diagnostics GmbH. The test had received Emergency Use Authorization from the U.S. Food and Drug Administration for the qualitative detection of Zika virus RNA in serum or urine (collected alongside a patient-matched serum specimen).

Moreover, the recent launch of a new application for the companion diagnostic associated with the use of Tarceva for the treatment of patients with non-small cell lung cancer is another significant addition to the company’s world-class test menu. We expect both these tests to help strengthen LabCorp’s companion diagnostics testing business with solid return from the second quarter itself.

In the field of test menu expansion, we observed that, last year the company successfully introduced 75 new assays and accelerated next-generation sequencing capabilities. Looking ahead we are encouraged by the company’s potential scope for test menu enhancement and geographic footprint expansion.

Complimentary capabilities were enriched through targeted tuck-in acquisitions. As a major improvement, the company’s companion diagnostic franchise achieved double-digit growth in 2015, and LabCorp is confident about delivering $100 million in incremental revenue in companion diagnostics through 2018.

In fact, the acquisition of Covance, which is operational under the label Covance Drug Development, is the primary reason for LabCorp’s steep growth trend from last year. Earlier, LabCorp had set a goal of $150 million in incremental revenues by the end of 2018.

In the first quarter, the acquisition of Covance contributed $687.3 million to the company's revenue, driving 23.7% year-over-year growth. The company is currently on track to achieve the incremental revenue synergy target. Furthermore, LabCorp expects to achieve annual cost synergies in excess of $100 million to be fully realized within three years of closing. The company is currently working on reducing cost and improving customer experience. Project LaunchPad is an active part of this initiative.

Stocks to Consider

Here are some other companies you may want to consider as our proven model shows these have the right combination of elements to post an earnings beat this quarter:

McKesson Corp. (MCK - Free Report) has an Earnings ESP of +1.2% and a Zacks Rank #2.

The Cooper Companies Inc. (COO - Free Report) has an Earnings ESP of +2.64% and a Zacks Rank #2.

CR Bard Inc. has an Earnings ESP of +0.41% and a Zacks Rank #2.

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