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LabCorp Reaffirmed Neutral

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Headquartered in Burlington, North Carolina, Laboratory Corporation of America Holdings (LH - Free Report) is the second largest independent clinical laboratory company in the US.

The company is aiming at increasing its revenues derived from esoteric testing in the next few years. Riding on the acquisitions of Monogram Bioscience (August 2009) and Genzyme Genetics (December 2010), LabCorp derives approximately 40% of revenues from genomic, esoteric and anatomic pathology categories, which can climb to 45% in the next 3-5 years. This specialized niche is now a much sought after avenue for top-line growth and its arch rival Quest Diagnostics (DGX - Free Report) is also engaged in strategic acquisitions to bolster its esoteric testing portfolio.

LabCorp has nonetheless strengthened its foothold in the diagnostics space through both organic and inorganic means and plans to collaborate with leading companies and academic institutions to provide a wider portfolio of tests. Some of the significant acquisitions include Orchid Cellmark, DCL in Indiana, and Westcliff Medical Laboratories (ongoing integration is expected to be completed in the first quarter of 2012) in California where LabCorp has a limited presence.

With regard to business collaborations with Managed Care Organizations (“MCOs”), LabCorp is doing a good job. The company has renewed some significant MCO contracts and is working to improve services. Besides a few stray cases, the company found the managed care environment to be relatively stable with respect to pricing and does not expect downward pricing pressure in contract renewals.

Besides, LabCorp is quite well capitalized on the liquidity front and entered into a new $1 billion credit facility in December 2011 (consisting of a five-year revolving facility in the principal amount of $1.0 billion). The company has been using its cash balance to make strategic acquisitions as well as reward its shareholders through share repurchases. LabCorp also believes that free cash flow should record a healthy increase in 2012-2013 as Genzyme Genetics starts contributing to the bottom line.

However, economic uncertainty is affecting LabCorp’s volume, which is visible in the continuous decline in organic growth over the past few quarters (3% in first, 2% in second and 1.2% in the third quarter of fiscal 2011). With no significant job growth in the economy or an increase in commercially insured covered lives, the company’s overall volume growth will continue to languish until the economy rebounds.

Considering the pros and cons, we reaffirm our Neutral recommendation on LabCorp. The stock retains a Zacks #3 Rank (Hold) in the short term.

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