LabCorp Remains at Neutral

We have reaffirmed our Neutral recommendation on Laboratory Corporation of America Holdings ( LH - Analyst Report ) , the second largest independent clinical laboratory company in the U.S. This was primarily based on the company’s current low-volume growth environment that compelled it to lower the fiscal 2012 outlook while posting the third-quarter results. The stock currently carries a Zacks Rank #4 (Sell). However, the company’s efforts on pipe-line expansion and focus on the high-margin esoteric testing business are expected to offset the near-term challenges.

Why Neutral?

LabCorp’s third-quarter performance was mixed as adjusted earnings per share (EPS) remained ahead of the Zacks Consensus Estimate, while revenues missed the mark. This poor revenues performance was primarily due to a challenging volume environment for testing laboratories and utilization weaknesses across the healthcare sector. Low level of employment and slow growth of commercially insured lives will continue to affect the company’s overall growth until the economy rebounds. This led the company to reduce the upper end of its growth outlook for 2012.

However, we believe that LabCorp’s strong portfolio will drive growth. The company is also working to expand its portfolio in the new swab family of tests that allows performing various women's health tests from a single-collection swab. 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 the IT initiatives to improve physician and patient experience. Moreover, LabCorp is concentrating on strategic acquisitions to grow further, the recent being the acquisition of Medtox Scientific that will help strengthen the company’s foothold in specialized toxicology testing.

The estimate revision trend depicted a somewhat cautious stance for the current fiscal. Over the past 60 days, none of the 17 firms covering the stock made any upward estimate revisions, while only 2 firms revised their estimates in the opposite direction, implying that challenges will persist and could intensify for LabCorp in the near term.

Other Stocks to Consider

While we prefer to remain on the sidelines on Volcano Corporation, other medical device stocks worth a look are Derma Science Inc. ( DSCI - Snapshot Report ) and Nxstage Medical Inc. ( NXTM - Snapshot Report ) . Both the stocks carry a Zacks Rank #1 (Strong Buy).