It has been about a month since the last earnings report for Laboratory Corporation of America Holdings (LH - Free Report) . Shares have added about 1.7% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is LH due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
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.
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).
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to seven lower.
Laboratory Corporation of America Holdings Price and Consensus
At this time, LH has an average Growth Score of C, however its Momentum is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for value and to a lesser degree growth.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, LH has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.