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Here's Why You Should Add LabCorp (LH) Stock to Your Portfolio

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Laboratory Corporation of America Holdings (LH - Free Report) or LabCorp has been gaining on increasing demand for COVID-19 tests as well as Covance business improvement on acquisitions and organic growth. However, severe impact on Diagnostics and Drug Development due to the pandemic and reimbursement cut are concerning.

Over the past year, the Zacks Rank #2 (Buy) stock has outperformed its industry. Shares of the company have gained 0.9% in the past year versus the industry’s 14.5% fall and the S&P 500’s 5.2% rise.

The renowned healthcare diagnostics company, offering comprehensive clinical laboratory services and end-to-end drug development support provider, has a market capitalization of $16.30 billion. The company projects 6.1% growth for the next five years and expects to maintain strong segmental performance. The company surpassed estimates in all of the trailing four quarters, the average positive surprise being 9.9%.


 

Let’s delve deeper.

Latest COVID-19 Tests: We are upbeat about LabCorp’s response toward combatting the pandemic. LabCorp was the first commercial lab to launch PCR testing on Mar 5, just after the FDA relaxed the rules around Emergency Use Authorization (EUA) for testing.

Further, it launched the LabCorp COVID-19 at-home test Collection Kit on Pixel by LabCorp platform, the first at-home collection kit to receive FDA’s EUA. Finally, the company recently launched serology testing, which helps determine if an individual has had an immune response to the virus.

Collaborations: We are optimistic about the Covance Drug Development (“CDD”) business benefitting from collaborations with leading pharmaceutical and biotechnology companies on potential antivirals, treatments and vaccines. The notable collaborations include the alliance with Ridgeback Biotherapeutics to test an antiviral drug.

Further, the CDD business is working with Adaptive Biotechnologies and Microsoft to focus on immune response to the virus. LabCorp is also working with Pacific Bioscience on unique research programs on virus characteristics that can support patient treatment decisions.

Q1 Results: LabCorp exited the first quarter on a strong note, with better-than-expected results despite the challenges arising from COVID-19. Although diagnostic testing revenues declined year over year, this was offset to some extent by increased COVID-19 testing performed by the company.

However, downsides might result from severe impacts on Diagnostics and Drug Development due to the pandemic and reimbursement cut. The segments were largely impacted due to clients postponing programs and lower demand for diagnostic testing. Diagnostics revenues fell year over year due to lower organic revenues from the COVID-19 impact and continued pricing pressure from implementation of the Protecting Access to Medicare Act (“PAMA”). LabCorp experienced a 50-55% fall in demand for testing unlike the company's normal daily levels at the quarter-end, thus impacting testing volume broadly.

Further, changes in governmental regulations had a significant impact on LabCorp’s operations. In the last few years, it faced several reimbursement issues hurting its revenues. The company is concerned about the Centers for Medicare & Medicaid Services’ latest Medicare reimbursement reduction as a result of PAMA.

Estimate Trend

LabCorp has been witnessing a positive estimate revision trend for 2020. Over the past 60 days, the Zacks Consensus Estimate for its earnings has moved 10.9% north to $9.69.

The Zacks Consensus Estimate for its second-quarter 2020 revenues is pegged at $2.38 billion, suggesting a 17.5% fall from the year-ago number.

Other Key Picks

A few other top-ranked stocks from the broader medical space are Aphria Inc. (APHA - Free Report) , Quest Diagnostics Incorporated (DGX - Free Report) and QIAGEN N.V. (QGEN - Free Report) .

Aphria’s long-term earnings growth rate is projected at 24.6%. It currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Quest Diagnostics’ long-term earnings growth rate is estimated at 7.6%. The company presently has a Zacks Rank #2.

QIAGEN’s long-term earnings growth rate is estimated at 12.2%. It currently sports a Zacks Rank #1.

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