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Here's Why You Should Hold on to LabCorp (LH) Stock for Now

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Laboratory Corporation of America Holdings (LH - Free Report) or LabCorp has been gaining from both of its operating segments domestically. The company’s increasing number of acquisitions, a favorable mix and current initiatives buoy optimism. However, price reductions due to the Protecting Access to Medicare Act (PAMA) and the loss of exclusivity in two managed-care contracts are downsides.

Over the past year, shares of the Zacks Rank #3 (Hold) company have lost 9% compared with the industry’s 21.7% decline.

The renowned healthcare diagnostics company, offering comprehensive clinical laboratory services and end-to-end drug development support providers, has a market capitalization of $13.34 billion. The company projects 6.7% growth for the next five years and expects to maintain its strong performance. Further, it delivered a positive earnings surprise of 2.2%, on average, over the trailing four quarters.

 


 

Let’s delve deeper.

Impressive Q4 Results: We are upbeat about the company’s fourth-quarter performance, where it reported better-than-expected results. It exhibited strong underlying and organic growth across its Diagnostics and Drug Development businesses on the solid execution of its three fundamental strategies. In the quarter, LabCorp also witnessed solid contributions from acquisitions. Further, its Diagnostics segment witnessed a solid rise in total volume (measured by requisition) and improvement in revenue per requisition in the fourth quarter.

The company is also on track with its Diagnostics and the Covance LaunchPad initiatives. The expansion of both margins further buoys optimism.

Contributions to Combat Coronavirus Outbreak: We are optimistic about LabCorp’s efforts to contain the global coronavirus outbreak. In early March, the company launched the 2019 Novel Coronavirus (COVID-19), NAA test for physicians and other authorized healthcare providers across the United States. Later, LabCorp confirmed that it reached the capability of performing more than 20,000 coronavirus tests per day, representing a significant increase in its capacity since the release of the test.

Further, LabCorp plans to explore all possible options to prioritize coronavirus testing for the hospital inpatient population, which includes patients currently being treated for suspected coronavirus infection, uplifts our sentiment.

Covance Drug Development (CDD) Expands: We are upbeat about the company’s progress in its CDD segment. LabCorp is enhancing the segment's offerings through acquisitions like that of MI Bioresearch, which is expected to create an opportunity for the CDD segment to move from preclinical to clinical development. We are also optimistic about the company’s plans to acquire Regulatory and Clinical Research Institute, a device-focused contract research organization that has strong regulatory consulting expertise.

Downsides

Adverse Impact of Reimbursement Cut: Changes in governmental regulations significantly affected LabCorp’s operations, especially in the last couple of years, where it faced several reimbursement issues that hurt its revenues. The company is concerned about the Centers for Medicare & Medicaid Services’ latest Medicare reimbursement reduction as a result of the implementation of PAMA.

Stiff Competition: LabCorp competes with biggies like Quest Diagnostics as well as other commercial laboratories and hospitals. While pricing is an important factor in choosing a testing lab, hospital-affiliated physicians expect a high level of service. As a result, LabCorp and other commercial labs compete with hospital-affiliated labs primarily based on the quality of service.

Estimate Trend

The company is witnessing a positive estimate revision trend for 2020. Over the past 60 days, the Zacks Consensus Estimate for its earnings has moved 3.7% north to $2.81.

The Zacks Consensus Estimate for LabCorp’s first-quarter 2020 revenues is pegged at $2.95 billion, suggesting a 5.6% rise from the year-ago reported number.

Key Picks

Some better-ranked stocks from the broader medical space are ResMed Inc. (RMD - Free Report) , Medtronic plc (MDT - Free Report) and QIAGEN N.V. (QGEN - Free Report) .

ResMed has a projected long-term earnings growth rate of 14.4%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Medtronic’s long-term earnings growth rate is estimated at 7.1%. The company presently carries a Zacks Rank #2.

QIAGEN’s long-term earnings growth rate is estimated at 10%. It currently carries a Zacks Rank #2.

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