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Will Diagnostics Business Ail LabCorp (LH) in Q4 Earnings?

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Laboratory Corporation of America Holdings (LH - Free Report) also known as LabCorp, is slated to report fourth-quarter 2018 results on Feb 7, before the market opens. In the last reported quarter, the company’s adjusted earnings lagged the Zacks Consensus Estimate by 4.53%. However, average trailing four-quarter beat was 1.55%.

Let's see how things are shaping up for this announcement.

Factors at Play

Within Diagnostics, the previous reported quarter witnessed trouble related to certain ransomware attack last July and an adverse impact of hurricane Florence. This induced lower-than-expected organic revenues for that quarter. To counter this effect, LabCorp has come up with its initiative to make certainorganizational changes for strengthening its leadership and operational performance. The company is also on track to launch the next phase of Diagnostics LaunchPad, which will result in multiyear cost savings of a similar magnitude like LaunchPad Phase I (under the drug development business).

In the fourth quarter, LabCorp is expected to particularly gain from its collaboration with Walgreens. Per the company, this partnership underpins the LabCorp-Walgreens channel, which is uniquely positioned to deliver a wide range of personalized, integrated, consumer-facing services over time.

We are also looking forward to the company’s alliance with European provider of clinical laboratory testing, Unilabs. This collaboration has started to broaden the network of laboratories used by biopharmaceutical companies to support companion diagnostic development and commercialization. Per LabCorp, companion diagnostics is a global opportunity and the tie-up with Unilabs is the first step toward extending its companion Dx offering worldwide.

Overall, from the fourth quarter itself, the company expects to deploy more capital for near- and long-term value creation including internal capital investments and strategic acquisitions and partnerships within its Diagnostics wing. However, how much this can contribute to the company’s top line in the quarter to be reported is unclear.

The company currently projects to report LabCorp Diagnostics revenues for the full year in the range of 2.1-2.5%, a reduction from the earlier-provided band of3-3.5%.

Within Covance Drug Development, we note that after suffering a dull phase for several quarters, the segment started to gross higher revenues exactly a year ago on the back of Chiltern acquisition and a strong organic growth profile besides a favorable foreign currency translation.

The Chiltern buyout proved accretive to LabCorp's portfolio with the addition of highly complementary capabilities to the company's offerings including scale expansion in the Asia Pacific region, a broader reach in the rapidly-growing emerging and mid-tier biopharma customer segments a well as the company’s expertise in the oncology drug development.

Apart from Chiltern, LabCorp continues to add Covance's offerings to its portfolio through targeted tuck-in acquisitions and partnerships. The latest on this list is the comprehensive laboratory collaboration with Baptist Health, the largest not-for-profit system in Kentucky. As part of this association, the company will utilize its fully standardized laboratory solutions, operational expertise and a comprehensive test menu to support the delivery of care across eight hospital-based labs. This apart, the company’s consolidation of Sciformix Corporation, a scientific process outsourcing company, is projected to cement LabCorp's position in the later phases of drug and device development, particularly for post-marketing pharmacovigilance and market access solutions.

All these factors should together constantly benefit the top line at LabCorp's Covance Drug Development in the yet-to-be reported quarter.

The company is also optimistic about the development regarding its multi-year project, LaunchPad. LabCorp currently remains on track to deliver $150 million of net savings from Covance LaunchPad by the end of 2020 and $30 million of cost synergies from the integration of Chiltern by the end of 2019.

Overall, the company currently expects 2018 Covance Drug Development revenue growth within 24-26%.

Per LabCorp's modified guidance for 2018, revenue rise is anticipated in the 9.9-10.3% band from 2017. Adjusted EPS forecast for the current year lies within the $10.95-$11.05 range.

What the Quantitative Model Suggests

Our proven Zacks model conclusively shows that a company with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has good chances of beating estimates if it also has a positive Earnings ESP.

LabCorp has a Zacks Rank #3 (Hold), which increases the predictive power of ESP. However, its Earnings ESP of 0.00% makes surprise prediction difficult.

The Zacks Consensus Estimate for fourth-quarter earnings of $2.48 reflects 1.22% growth year over year. Revenue increase is pegged at $2.78 billion, a 0.46% slip year over year. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter.

Stocks to Consider

Here are a few medical stocks worth considering from the same space as these comprise the right mix of elements to exceed expectations this reporting cycle.

DexCom, Inc. (DXCM - Free Report) has an Earnings ESP of +8.93% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.

MacroGenics, Inc. (MGNX - Free Report) has an Earnings ESP of +8.15% and is a Zacks #2 Ranked player.

NanoString Technologies, Inc. (NSTG - Free Report) has an Earnings ESP of +4.64% and a Zacks Rank of 2.

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