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Results In: LabCorp passes Market Test

During the tumultuous first few months of 2018, the health-care services industry has held up better than most pockets of the S&P 1500 Index, with shares of stocks in the group up an average of 3%, notes Richard Moroney, editor, Dow Theory Forecasts.

As one of the biggest players in this space, Laboratory Corp. of America (LH; $167) is generating strong operating momentum, while offering an upbeat outlook and appealing valuation. Equally important, its business appears insulated from emerging concerns in other parts of the stock market.

LabCorp is coming off a strong year, when adjusted earnings per share grew 9%, revenue 8%, operating cash flow 24%, and free cash flow 28%. About 81% of LabCorp’s revenue comes from the U.S., a highly attractive market, given its aging population. Not surprisingly, Americans over the age of 65 spend more on health care than any other age group. Over the next 20 years, this demographic is projected to encompass 22% of the total population, versus 15% today. LabCorp is a Buy and a Long-Term Buy.

Two Revenue Streams

LabCorp’s legacy diagnostics business generates 70% of sales and 86% of operating earnings. It processes tests both routine, such as basic blood work, and esoteric, such as molecular diagnostics. The company has a 9% share of the $80 billion U.S. diagnostics market, comprised of more than 250,000 independent labs, hospital labs, and physician-office labs. Among independent labs, LabCorp takes a 20% share, second to Quest Diagnostic’s (DGX; $100) 24% slice.

For years, LabCorp has snapped up smaller labs, pressing its advantage in a fragmented market that carries high fixed costs and rewards economies of scale. The company switched gears in 2015 with its $6.15 billion purchase of Covance, a contract-research organization. LabCorp doubled down on drug development last September by acquiring a second CRO, Chiltern International, for $1.22 billion. Those two acquisitions comprise LabCorp’s Covance drug development unit, representing 30% of sales and 14% of earnings last year. This unit has a roughly 10% share of global CRO market.

Diagnosis – Growth

New Medicare reimbursement rules will likely pressure lab prices, which would disproportionally hurt smaller labs, potentially creating more opportunities for LabCorp to acquire rivals.

LabCorp forecasts 2018 per-share profits of $11.30 to $11.70, implying 18% to 22% growth. The implementation of new Medicare reimbursement rules is projected to shave 5% off 2018 earnings. But LabCorp sees the new tax law increasing profits 14%, augmenting a 9% to 14% boost from operations. The company expects revenue to climb 9.5% to 11.5% this year. The drug-development business is projected to post 20% to 24% higher sales, outpacing expected growth of 3% to 5% for the diagnostics unit. Shares trade at 17 times trailing earnings, below their three-year average of 18.5 and industry average of 24.

An annual report for Laboratory Corp. of America Holdings is available at 358 S. Main St., Burlington, NC 27215, (336) 229-1127, www.labcorp.com.

Editor’s Note: Richard Moroney is editor of Dow Theory Forecasts, 7412 Calumet Ave., Hammond, IN 46324. 1 year, 52 issues, $289. www.dowtheory.com.


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