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What's in the Offing for LabCorp's (LH) Earnings in Q4?

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Laboratory Corporation of America Holdings (LH - Free Report) also known as LabCorp is slated to report fourth-quarter 2019 results on Feb 7, before the market opens.

In the last reported quarter, the company’s adjusted earnings exceeded the Zacks Consensus Estimate by 2.11%, repeating its beat streak from the remaining three of the trailing four quarters, the average being 2.08%.

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

Factors at Play

In the last few quarters, LabCorp’s underlying core business put up a stable performance. Sustaining this momentum, within Diagnostics, the company is likely to have generated strong revenue growth in the fourth quarter as well, banking on the following facts:

In October 2019, the company acquired the diagnostic clinical laboratory testing business of South Bend Medical Foundation (SBMF) to enhance the scope of local services that LabCorp offers to hospitals, physicians and patients across Indiana, Michigan, Ohio and Illinois. This strategic move to broaden the company’s diagnostic laboratory arm network is expected to have contributed to the company’s top line in the to-be-reported quarter.

Another new partnership with New Jersey Primary Care Association (that represents 23 community health centers) to provide physicians with accessible comprehensive and secure integrated lab and clinical data is likely to have helped increase the company’s customer base through the fourth quarter.

Further, LabCorp officially collaborated with Horizon, NJ-based UnitedHealthcare and Aetna, placing its in-network under all major national plans. Ever since, the company has been registering consistent organic growth on the back of these alliances. This upside might reflect on the company’s fourth-quarter results.

However, in the last reported quarter, PAMA (Protecting Access to Medicare Act) left a negative impact of 90 basis points on organic revenues. The company is currently working to overcome the inequitable Medicare price reductions imposed by the flawed implementation of PAMA. To this end, it is considering the lately-introduced Laboratory Access for Beneficiaries Act as a significant step to reform PAMA for producing a market-based Medicare fee schedule. However, with near-term visibility seeming bleak at the moment, we anticipate PAMA to once again dent the fourth-quarter top-line results.

Within Covance Drug Development, LabCorp is focused on driving profitable growth through expanded solutions and enhanced operational capabilities. The newly-opened R&D center in Shanghai established Covance as the only CRO (contract research organization) to offer comprehensive R&D services from early development via commercial solutions in China. This, in turn, fortified the company’s presence significantly in China, which might reflect on the company’s sales in China in the to-be-reported results.

The Chiltern integration substantially strengthened the company’s strategic position in clinical development and is accelerating revenues and profit growth within Covance. On this front, LabCorp is keeping a good pace with its objective to streamline the drug development process. This steady effort should further get reflected in the company’s impending results.

Additionally, the company progressed with the Covance LaunchPad initiative. In the first phase, as expected, it achieved a cost synergy of $30 million from the acquisition of Chiltern. At the exit of third-quarter 2019, it remained on track to deliver $150 million of net savings by the end of 2020, a trend that mostly likely continued in the fourth quarter as well, boosting the quarter’s bottom line.

This apart, the innovative business swap transaction with Envigo is expected to have favored the company’s top line in the fourth quarter. The transaction provides Covance with better global non-clinical research capabilities while maintaining access to bigger research models and services through a multi-year renewable supply agreement.

Overall, for 2019, LabCorp expects year-over-year revenue growth of 1.5-2%, which includes a projected adverse impact of 1.5% from the disposition of businesses and a negative foreign currency movement of 0.6%. Adjusted earnings per share estimate for 2019 stands at $11.20-$11.30, indicating a 1.6-2.5% rise from the reported 2018 figure.

Key Q4 Estimates

The Zacks Consensus Estimate for fourth-quarter earnings of $2.93 implies an 11.1% improvement from the year-ago reported figure. The consensus estimate for revenues is pegged at $2.93 billion, suggesting a 5.1% increase from the prior-year reported number.

What the Quantitative Model Suggests

Per our proven model, a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to deliver a positive earnings surprise. But this is not the case here as you will see below.

Earnings ESP: LabCorp has an Earnings ESP of -0.6%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: LabCorp carries a Zacks Rank #4 (Sell). 

Stocks Worth a Look

Here are a few medical stocks worth considering with the right combination of elements to beat on earnings this reporting cycle.

Glaukos Corporation (GKOS - Free Report) has a Zacks Rank #3 and an Earnings ESP of +17.65%.

Tandem Diabetes Care, Inc. (TNDM - Free Report) has a Zacks Rank of #2 and an Earnings ESP of +27.59%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Nevro Corp. (NVRO - Free Report) is Zacks #3 Ranked and has an Earnings ESP of +10.42%.

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