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Laboratory Corporation of America Holdings’ (LH - Analyst Report) disappointing second quarter 2012 results, released on July 19, prompted analysts to slash their estimates for the forthcoming periods, pricing in the challenges currently at play in this sector.

Second Quarter Highlights

LabCorp reported earnings per share (“EPS”) of $1.56 in the second quarter of fiscal 2012 compared with $1.20 in the year-ago quarter. Restructuring charge aside, the company recorded expenses related to acquisitions and loss on the disposal of one of its European subsidiaries and one of its joint ventures.  

Adjusted EPS came in at $1.77 (excluding amortization, restructuring and other special charges), a penny behind the Zacks Consensus Estimate. Earnings, however, surpassed the previous year's adjusted EPS of $1.64.

Revenues increased 1.4% year over year to $1,423.4 million, marginally missing the Zacks Consensus Estimate of $1,440 million. The low-volume-growth environment is reflected in flat testing volume (measured by requisitions) while revenue per requisition increased a nominal 1.5%.

LabCorp narrowed its guidance for fiscal 2012. The company expects 2−3% revenue growth (previous guidance of 2−3.5%), resulting in adjusted EPS of $6.80−$7.00 ($6.75−$7.05) in the fiscal year.

In addition, guidance for operating cash flow and capital expenditure remained unchanged at $950 million and $155 million, respectively. Genzyme Genetics is expected to be slightly accretive to 2012 earnings.

For a full coverage on the earnings, read: LabCorp Misses, Narrows Guidance

Agreement of Analysts

With economic uncertainty taking a toll on the company’s performance, estimate revision trend is bearish for the next two quarters as well as the fiscals ahead. Over the last 7 days, 11 of the 17 analysts covering the stock have lowered their estimates for the third quarter of 2012, with no revisions northward. The same trend can be seen for the current fiscal year, with 12 downward revisions. None of the analysts have raised their estimates.

A continuous decline in organic volume growth, lower utilization trends and impending reimbursement cuts in 2013 are the major headwinds for LabCorp. Consequently, the company reported flat volume growth during the reported quarter with a 0.5% decline in organic volume, a disappointment from 1% growth in the first quarter.

The company also fared worse than its peer Quest Diagnostics (DGX - Analyst Report), which clocked 0.7% organic volume growth. The decline was primarily due to flattened Vitamin D test volume, which has been a growth driver historically and continued weakness in the histology category. We note that organic growth has been on a declining trend over the past few quarters – 3% in first, 2% in second, 1.2% in the third and 0.7% in the fourth quarter of fiscal 2011.

With no significant job growth in the economy or an increase in commercially insured covered lives, the company’s overall volume growth will continue to languish until the economy rebounds. Given the challenging scenario the company narrowed its growth outlook for 2012.

The reimbursement scenario is also challenging with an impending cut of approximately 5% in the clinical lab fee schedule beginning January 1, 2013. Mandatory physician fee schedule will also witness a 2% cut, effective January 1, 2013. LabCorp derives 12% and 2% of its revenues from clinical lab fee schedule and physician fee schedule, respectively.

Magnitude of Estimate Revisions

With the majority of analysts lowering their estimates for the forthcoming period, the consensus estimate for the third quarter dropped by a couple of cents to $1.75 in the past 7 days. The consensus estimate for fiscal 2012 also witnessed a drop of 5 cents to $6.95 over the last 7 days, indicative of market pessimism on the back of sluggish macroeconomic trends.

Neutral on LabCorp

LabCorp reported a disappointing second quarter with both revenues and adjusted EPS lagging the Zacks Consensus Estimates. This was followed by an overall market pessimism with the analysts scaling down expectations for the future. The low-volume-growth environment is reflected in flat testing volume while revenue per requisition increased 1.5%.

The current economic uncertainty continues to adversely affect the company. The company is also exposed to the reduction in clinical and physician lab fee schedule, effective January 2013. We do not expect any significant improvement in the situation in near future. The stock retains a Zacks #4 Rank (Sell) in the short term.

Despite these challenges, the company is working on portfolio expansion to drive its top line. The company is focusing more on the high-margin esoteric testing business, which is expected to contribute 45% of total sales in the next 3–5 years. LabCorp is also paying due attention to IT initiatives to improve physician and patient experience.

LabCorp continues to work closely with Managed Care Organizations (MCOs) by providing value added capabilities and services. We are impressed with the company extending its contract with WellPoint (WLP - Analyst Report) on a multi-year basis with stable pricing and exclusivity retained in all of the key markets. The company is also engaged in contract renewal discussions with Humana (HUM - Analyst Report), due 2012 and Cigna (CI - Analyst Report), due mid-2013.

Over the long term, we have a Neutral recommendation on LabCorp.

About Earnings Estimate Scorecard

As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at  http://www.zacks.com/education/

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