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Here's Why You Should Retain LabCorp (LH) Stock For Now

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Laboratory Corporation of America Holdings or LabCorp (LH - Free Report) is well poised for growth in the coming quarters, backed by strength in the Covance Drug Development arm. The company’s plans to expand in high-growth areas like rheumatoid arthritis or oncology instills optimism. A good solvency position is an added advantage. However, decline in COVID-19 testing demand raises concern over the stock. Stiff competition and unfavorable currency movements are other headwinds.

Over the past year, the Zacks Rank #3 (Hold) stock has gained 43.5% against 24.2% growth of the industry and the 27.8% rise of the S&P 500.

The renowned healthcare diagnostics company has a market capitalization of $26.69 billion. Its second-quarter 2021 earnings per share surpassed the Zacks Consensus Estimate by 8.7%.

Over the past five years, the company’s earnings grew 24.6%, way ahead of the industry’s 11.1% rise and the S&P 500’s 2.8% rise. The company’s long-term expected growth rate of 10.6% for earnings compares with the industry’s long-term growth expectation of 13.7% and the S&P 500’s estimated 11.3% rise.

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Let’s delve deeper.

Factors At Play

Covance Drug Development Arm Grows: We are upbeat about LabCorp’s Drug Development arm, which is benefiting from collaborations with leading pharmaceutical and biotechnology companies. In the second quarter, within this business, revenues improved 36.7% year over year riding on 31.8% organic growth. The segment delivered broad-based revenue growth across all businesses, including COVID-19 vaccine and therapeutic studies. Banking on a strong momentum, the company has raised its 2021 revenue growth expectations in Drug Development to 17-19%. At present, the drug development team is involved in many studies on potential vaccines and treatment for COVID-19 worldwide.

Targeted Development in High-Growth Areas: LabCorp’s efforts to identify and expand in high-growth opportunity areas raise our optimism. The company’s acquisition of an autoimmune business unit from Myriad Genetics (MYGN - Free Report) , including the Vectra rheumatoid arthritis assay, is likely to strengthen its position in rheumatoid arthritis. In the second quarter, LabCorp launched several new oncology tests, including the OmniSeq INSIGHT for patients with advanced solid tumor cancers.  In addition, the company has agreed to acquire the outreach laboratory business of Minnesota-based North Memorial Health, and will provide management services to its inpatient lab.

Strong Solvency Position: LabCorp exited the second quarter of 2021 with cash and cash equivalents of $1.96 billion. Meanwhile, total debt in the quarter came at $5.42 billion. While the quarter’s total debt was much higher than the corresponding cash and cash equivalent level, the current-year payable debt plus short-term borrowings of $1.8 million is much lower than the short-term cash level. This is positive news in terms of the company’s solvency level. It implies that the company is holding sufficient cash for short-term debt repayment, especially during this time of economic uncertainties.

Downsides

Decline in COVID-19 Testing: In second-quarter 2021, LabCorp experienced an overall decline in COVID-19 testing with an average of 54,000 PCR tests per day, given a steady decline in the number of positive cases. Despite the recent emergence of new strain of the virus, the company has no clarity regarding the future trail of COVID-19 testing demand.

Competitive Landscape: LabCorp faces significant competition from notable MedTech players, and other commercial laboratories and hospitals. In a $55-billion U.S. lab market, hospitals control an estimated 55% of the diagnostic test market share versus LabCorp’s 10% share.

Currency Headwind: LabCorp is highly susceptible to currency fluctuations since the company derives a huge share of its revenues from international markets. Adverse currency movements have impacted the company’s performance in the last few quarters, as in the case of other MedTech players.

Estimate Trend

LabCorp has been witnessing a positive estimate revision trend for 2021. Over the past 90 days, the Zacks Consensus Estimate for its earnings has moved north by 4.3% to $23.82.

The Zacks Consensus Estimate for its third-quarter 2021 revenues is pegged at $3.58 billion, suggesting 8.2% decline from the year-ago reported number.

Key Picks

Two better-ranked stocks from the Medical-Dental Supplies industry include West Pharmaceutical Services, Inc. (WST - Free Report) and Patterson Companies, Inc. (PDCO - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s  Zacks #1 Rank (Strong Buy) stocks here.

West Pharmaceutical has a long-term earnings growth rate of 27.3%.

Patterson Companies has a long-term earnings growth rate of 9.6%.