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Will LabCorp (LH) Pull a Surprise this Earnings Season?

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Laboratory Corp. of America Holdings (LH - Free Report) or LabCorp is expected to report first-quarter 2017 results before the market opens on Apr 25.

Last quarter, the company reported a positive earnings surprise of 0.94% with an average beat of 0.78% for the trailing four quarters. Let's see how things are shaping up prior to this announcement.

Factors at Play  

We are currently looking forward to LabCorp’s expansion of its drug development business worldwide. The company completed the integration of central lab facilities in Singapore and China in fourth-quarter 2016, which may start contributing to the company’s top line from this quarter itself.

In this regard, we note that, LabCorp is on track to complete the site consolidations in the U.S. and Europe by mid-2017. This is part of the company’s $100 million cost synergy initiative within its Covance drug development business.

We are also upbeat about the company’s ongoing cost reduction initiatives related to project LaunchPad, which currently has over 100 projects at various stages of implementation. LabCorp is currently in the third and final year of its goal of sustainably reducing the expense of this business. Hence, we expect it to improve the company’s operating margin scenario in the to-be-reported quarter. LabCorp currently expects LaunchPad initiatives to generate additional savings extending into 2018 and beyond.

Earlier, the company stated that it has already started to enjoy the benefit from the ongoing implementation of lab automation such as its proprietary Propel robot. This should get reflected in the first-quarter results as well.

The company’s companion diagnostics portfolio, which grew a robust 35% in the last couple of years, should also maintain its momentum in 2017. Notably, within immuno-oncology drug development, it doubled the number of study awards from 2015 to 2016 and also performed a number of PD-L1 tests through Diagnostic and Drug Development segments.

However, the recently completed acquisition of Sequenom may continue to impact the company’s operating margin in the to-be-reported quarter due to its unfavorable product margin. However, with the acquisition, LabCorp aims to expand its presence in both domestic and international levels. The addition of Sequenom has positioned the company as the market leader in non-invasive prenatal testing, women's health and reproductive genetics.

Also, the change in upper management with Gary Huff being promoted as the CEO of LabCorp Diagnostics may prove fruitful for the business segment in days ahead.

However, foreign exchange woes and intense competition from major commercial laboratories and hospitals may act as headwinds. For full-year 2017, the company projects a 60 basis points impact from foreign exchange risks due to the strengthening of dollar. We are also highly disappointed with the CMS proposal related to the Protecting Access to Medicare Act.

Earnings Whispers

Our proven model does not conclusively show that LabCorp is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP:  LabCorp has an Earnings ESP of -0.91%. This is because the Most Accurate estimate stands at $2.17, lower than the Zacks Consensus Estimate of $2.19. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: LabCorp has a Zacks Rank #3 which increases the predictive power of ESP. However, a negative ESP makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a few companies you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Becton, Dickinson and Company (BDX - Free Report) has an Earnings ESP of +0.45% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.

Applied Materials, Inc. (AMAT - Free Report) has an Earnings ESP of +1.32% and a Zacks Rank #1.

Potlatch Corporation (PCH - Free Report) has an Earnings ESP of +29.17% and a Zacks Rank #2.

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