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Laboratory Corporation of America Holdings (LH - Free Report) or LabCorp reported second-quarter 2017 adjusted earnings per share (EPS) of $2.47, up 4.7% from the year-ago quarter. The quarter’s adjusted EPS also exceeded the Zacks Consensus Estimate by 3.8%. On a reported basis, LabCorp’s net earnings came in at $1.82 per share, a 7.1% decline year over year.

Net revenue for the second quarter increased 4.9% year over year to $2498.4 million. The quarterly revenue number also topped the Zacks Consensus Estimate of $2.47 billion.

Strong growth in LabCorp Diagnostics, solid acquisition related growth as well as organic volume growth contributed to the year-over-year top-line improvement. However, this was partially offset by poor show in Covance Drug Development. Also, while adverse foreign exchange movement hampered the quarterly top-line number to the tune of 60 basis points (bps), the year-over-year comparison to a Leap Year and the timing of the Easter holiday hindered the reported quarter’s growth by 1%.

Organic revenue growth (net revenue growth minus revenue from acquisitions excluding the currency impact) was 1.9%.

 

Quarter Under Review

Currently, LabCorp reports under two operating segments: LabCorp Diagnostics and Covance Drug Development.

In the reported quarter, LabCorp Diagnostics reported net revenue of $1.80 billion, up 8.4% year over year, fueled by price, mix, tuck-in acquisitions and organic volume (measured by requisitions excluding requisitions from acquisitions for the first 12 months after the close of each acquisition). The company reported 5% increase in total volume (measured by requisition) and a 3.6% increase in revenue per requisition in the quarter.

Covance Drug Development reported a 3.1% drop in net revenue to $699.7 million in the second quarter. This was due to the impact of cancellation by sponsors of two large clinical studies in late 2016 — for which, Covance Drug Development used to provide central laboratory services — and a negative impact of 140 bps from foreign currency translation. At Constant Exchange Rate (CER), net revenue declined 1.7% year over year.

Gross margin contracted 22 bps to 34.5% in the quarter. Adjusted operating income increased 2.2% year over year to $426.5 million. Adjusted operating margin contracted 45 bps from the year-ago quarter to 17.1% on a 6.3% rise in selling, general and administrative expenses to $435.3 million.

LabCorp exited the quarter with cash and cash equivalents of $299.9 million compared with $365 million at the end of 2016. Year-to-date operating cash flow was $544.5 million, up from $477.1 million in the year-ago period. Free cash flow came in at $403 million, up from $338.7 million in the year-ago period. During the quarter, the company returned $108 million to shareholders through share repurchases and currently has $489.5 million of authorization, remaining under its existing share repurchase plan.

Outlook

Despite a dull show within Covance Drug Development, the company increased its earlier provided 2017 outlook.

Net revenue growth is now expected to remain in the band of 5-6.5% year over year, ahead of the earlier range of 3.5−5.5%. This includes a 10 bps impact (earlier the projection was 40 bps impact) from an unfavorable foreign exchange headwind. The current Zacks Consensus Estimate for revenues is pegged at $9.86 billion.

Adjusted EPS guidance for 2017 has also been increased to the range of $9.30−$9.65 (previous range: $9.20−$9.60). The current Zacks Consensus Estimate of $9.42 falls within the guided range.

However, free cash flow expectation remains unchanged in the band of $925−$975 million (up 3–9% from the prior year).

Our Take

LabCorp posted a better-than-expected quarter with second-quarter earnings and revenues, both topping the respective Zacks Consensus Estimate. While LabCorp Diagnostics business was strong, Covance Drug Development provided dull numbers. Per the company, the impact of the cancellation by sponsors of two large clinical studies in late 2016 affected the results. This apart, an unfavorable foreign exchange continues to hamper the company’s overall results. However, an increased guidance for 2017 boosts investors’ confidence indicating chances of respite anytime soon.

Nonetheless, we believe that with the integration of newer acquisitions, LabCorp is perfectly positioned to drive long-term profitable growth through a combination of world-class diagnostics, drug development expertise and knowledge services.

Zacks Rank & Key Picks

LabCorp currently has a Zacks Rank #4 (Sell). A few better-ranked medical stocks , Mesa Laboratories, Inc. (MLAB - Free Report) , INSYS Therapeutics, Inc. (INSY - Free Report) and Align Technology, Inc. (ALGN - Free Report) . Notably, INSYS Therapeutics and Align Technology sport a Zacks Rank #1 (Strong Buy), while Mesa Laboratories carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology has an expected long-term adjusted earnings growth of almost 24.1%. The stock has surged roughly 35.7% over the last three months.

INSYS Therapeutics has long-term expected earnings growth rate of 20%. The stock has gained around 4.3% over the last three months.

Mesa Laboratories delivered a positive earnings surprise of 2.84% for the last four quarters. The stock has added nearly 3.1% over the last three months.

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