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LabCorp (LH) Beats on Q1 Earnings, Revenues, Lifts '18 View

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Laboratory Corporation of America Holdings (LH - Free Report) , or LabCorp, reported first-quarter 2018 adjusted earnings per share (EPS) of $2.78, up 30.5% from the year-ago quarter. The bottom line also exceeded the Zacks Consensus Estimate by 5.3%.

On a reported basis, LabCorp’s net earnings came in at $1.67 per share as compared to $1.75 in the year-ago period.

Revenues for the first quarter increased 18% year over year to $2.85 billion. The top line exceeded the Zacks Consensus Estimate of $2.78 billion. The year-over-year rise in revenues was owing to 13.4% growth from acquisitions, organic growth of 3.2% and a benefit of approximately 150 basis points from foreign currency translation.

Quarter Under Review

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

In the reported quarter, LabCorp Diagnostics reported revenues of $1.77 billion, up 8% year over year, fueled by tuck-in acquisitions, organic volume (measured by requisitions) and a gain from foreign currency translation of roughly 30 basis points. This was partially offset by lower Medicare reimbursement as a result of the implementation of the Protecting Access to Medicare Act (PAMA) and the impact from adverse weather.

The company reported a 6.9% rise in total volume (measured by requisition) and a 0.7% increase in revenue per requisition in the concerning quarter.

Covance Drug Development reported a 39.3% rise in revenues to $1.08 billion in the first quarter. This upside was primarily on the back of acquisitions, organic growth and the foreign currency translation benefit of nearly 390 basis points.

Gross margin deteriorated 211 bps to 27.3% in the reported quarter. Adjusted operating income was up 3.3% year over year to $382 million. However, adjusted operating margin contracted 190 bps from the year-ago quarter to 13.4% on a 16.3% rise in selling, general and administrative expenses to $397 million.

LabCorp exited the first quarter of 2018 with cash and cash equivalents of $361.8 million compared with $316.7 million at the end of 2017. Operating cash flow at the end of the first quarter was $154.7 million, down 31.5% from $225.9 million in the year-ago period. Free cash flow came in at $82.8 million in this period, down 46.5% from the year-ago period.

During the quarter under discussion, the company returned $75 million to shareholders via share repurchases. On Apr 24, 2018, the board authorized an increase in LabCorp’s share repurchase program to a total of $1 billion.

Outlook

LabCorp has updated its 2018 guidance considering the adoption of ASC 606.

Revenue growth is expected to remain in the band of 10-12% from 2017 (earlier projected band was 9.5-11.5%) including a likely improvement of 90 bps (from projection of 60 bps improvement earlier) from a foreign currency translation. The Zacks Consensus Estimate for current-year revenues is pegged at $11.48 billion.

Adjusted EPS projection for 2018 however, has been kept unchanged in the range of $11.30-$11.70. However, this guidance now includes the projected negative impact of 20 cents to 30 cents for the full year 2018 from ASC 606, offset by strong first quarter results and an improved outlook for the remainder of the year. The consensus mark of $11.55 for the metric falls within the guided range.

Free cash flow has been anticipated within $1.1-$1.2 billion, growth in the band of 0-9.1% from the prior year (unchanged).

Our Take

LabCorp posted a strong first-quarter performance with adjusted earnings and revenues both exceeding the respective Zacks Consensus Estimate. Strong year-over-year growth in both earnings and revenues were encouraging. LabCorp Diagnostics business was solid on the back of increasing acquisitions, organic volume expansion and a favorable foreign exchange scenario.

Also, after several quarters of dull performance, Covance Drug Development has been reporting sturdy growth over the past few of terms. This uptrend was primarily owing to strategic acquisitions, robust organic growth and a positive foreign currency translation. The 2018 guidance also looks promising.

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 has a Zacks Rank #2 (Buy).

Other top-ranked stocks in the broader medical sector include Abaxis, Inc. (ABAX - Free Report) , Bio-Rad Laboratories, Inc. (BIO - Free Report) and ResMed Inc. (RMD - Free Report) . While Abaxis and Bio-Rad sport a Zacks Rank #1 (Strong Buy) ResMed carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Abaxis is expected to release fourth-quarter fiscal 2018 results on Apr 26. The Zacks Consensus Estimate for adjusted EPS is 32 cents and for revenues is $67 million.

Bio-Rad is expected to report first-quarter 2018 results on May 3. The Zacks Consensus Estimate for adjusted EPS is 90 cents and for revenues is $529.5 million.

ResMed is slated to release third-quarter fiscal 2018 results on Apr 26. The Zacks Consensus Estimate for adjusted EPS is 83 cents and for revenues is $564.9 million.

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