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Here's Why Investors Should Retain LabCorp (LH) Stock for Now

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Laboratory Corporation of America Holdings or LabCorp (LH - Free Report) is gaining from the strength in its Drug Development business. The company’s continued commitment to pandemic support instills optimism. A strong solvency position is an added advantage. However, a weak margin scenario and foreign exchange headwinds do not bode well.

In the past year, the Zacks Rank #3 (Hold) stock lost 15.4% compared with a 14.1% plunge in the industry and the S&P 500.

The renowned healthcare diagnostics company has a market capitalization of $21.27 billion. The company’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 17.6% on average.

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Let’s delve deeper.

Factors At Play

Pandemic Support Related Progress: LabCorp continues to maintain its capacity to process 300,000 PCR tests per day, pending supplies and labor to stay prepared for potential new waves of infections or new variants. In terms of COVID-19 testing, the company’s PCR volume was approximately 70,000 per day for the first quarter. The time to results for COVID PCR tests remained at one day on average.

This month, LabCorp gained FDA emergency use authorization (EUA) for its VirSeq SARS-CoV-2 NGS (next-generation sequencing) Test on the PacBio Sequel II sequencing system. In March 2022, LabCorp and Walgreens announced the nationwide availability of Pixel by Labcorp COVID-19 at-home collection kit.

Covance Drug Development Growth Continues: The Drug Development business benefits from collaborations with leading pharmaceutical and biotechnology companies. In the first quarter, within this business, revenues inched up 1.5% year over year. The business also ended the reported quarter with a trailing 12-month net book-to-bill of 1.23 and a robust backlog of $15.2 billion, up 8.7% from the year-ago period’s levels.

The compound annual growth rate for Drug Development base business revenue was 10.7% compared to the first quarter of 2019, primarily driven by organic growth. The company anticipated Drug Development revenues to rise in the band of 6-8.5% in 2022 from 2021 levels.

Solvency Position: LabCorp exited the first quarter of 2022 with cash and cash equivalents of $1.23 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 is $1.6 million. The figure is much less than the short-term cash level. This is a positive in terms of the company’s solvency level as, during economic uncertainties, the company has sufficient cash for short-term debt repayment.

Downsides

Weak Margins: LabCorp’s gross margin contracted 681 basis points (bps) to 31.6% in the first quarter. Adjusted operating income marked a 34.2% plunge from the year-ago period. The adjusted operating margin declined 838 bps from the year-ago quarter’s levels to 19.7%. Per management, this decline in adjusted operating income and margin is primarily attributable to a reduction in COVID-19 testing, higher personnel expenses and other inflationary costs.

Exposed to Currency Headwind: With LabCorp deriving a vast share of its revenues internationally, it remains highly exposed to currency fluctuations. Unfavorable currency movements have been a significant dampener over the last few quarters, as in the case of other important MedTech players too.

Tough Competition: LabCorp faces intense competition from commercial laboratories and hospitals. In a $55 billion U.S. lab market, hospitals control an estimated 55% of the diagnostic test market, compared to LabCorp’s 10% share. LabCorp and other commercial labs compete with hospital-affiliated labs primarily based on the quality of service.

Estimate Trend

In the past 90 days, the Zacks Consensus Estimate for LabCorp’s 2022 earnings has moved down by 5% to $19.80.

The Zacks Consensus Estimate for its 2022 revenues is pegged at $15.32 billion, suggesting a 4.8% decline from the 2021 comparable figure.

Key Picks

A few better-ranked stocks in the broader medical space are Alkermes plc (ALKS - Free Report) , AMN Healthcare Services, Inc. (AMN - Free Report) and Medpace Holdings, Inc. (MEDP - Free Report) .

Alkermes has an estimated long-term growth rate of 25.1%. Alkermes’ earnings surpassed estimates in the trailing four quarters, the average surprise being 350.5%. It currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alkermes has outperformed the industry in the past year. ALKS has gained 15.2% against the industry’s 44.2% decline in the said period.

AMN Healthcare has a long-term earnings growth rate of 1.1%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.6%, on average. It currently flaunts a Zacks Rank #1.

AMN Healthcare has outperformed its industry in the past year. AMN has gained 4.9% against the industry’s 54.7% fall.

Medpace has a historical growth rate of 27.3%. Medpace’s earnings surpassed estimates in the trailing four quarters, the average surprise being 17.1%. It currently has a Zacks Rank #2 (Buy).

Medpace has outperformed its industry in the past year. MEDP has declined 25.3% compared with the industry’s 54.7% fall.