First Quarter Highlights
 
On April 21, LabCorp (LH) reported first quarter fiscal 2010 earnings per share (EPS) of $1.25 compared with earnings of $1.22 in the year-ago period. However, after considering restructuring and other special charges, the company’s EPS came in at $1.30, missing the Zacks Consensus Estimate by a penny.
 
Revenues recorded a 3.3% year-over-year increase to $1.19 billion. During the quarter, there was a 3% decline in testing volume (measured by accessions) while revenue per requisition increased 6.4%. However, excluding the consolidation of the company’s Canada unit, revenues would have increased 2.2%; testing volume would have declined 3.3% while revenue per requisition would have recorded a growth of 5.7%.
 
In addition, LabCorp reiterated its guidance for 2010. The company expects EPS in the range of $5.35–$5.55 with a 2.5%−4.5% growth in revenues. LabCorp expects to generate $870 million of operating cash flow and incur $135 million of capital expenditure.
 
For a full coverage on the earnings, read: LabCorp Misses by a Penny
 
Agreement of Analysts
 
Following the release of first quarter results, estimate revision trends among the analysts depict a mixed trend for LabCorp’s earnings in the forthcoming period. Over the last 30 days, 9 of the 19 analysts covering the stock have made upward revisions for the second quarter, with estimates for the third quarter, fiscal 2010 and fiscal 2011 being increased by 7, 3 and 2 analysts, respectively.
 
The number of downward revisions is few, with 2 and 3 analysts lowering their estimates for the second and third quarters while estimates for fiscal 2010 and fiscal 2011 have been lowered by 4 and 5 analysts, respectively.
 
Bad weather conditions had an adverse impact on the company during the first quarter. It reduced volume by 1.3%, revenues by $23 million and EPS by about 8 cents. Apart from bad weather, the termination of two large government contracts in 2009 reduced volume by another 2.4%. Excluding the impact of these factors, volume would have increased 0.4% during the quarter.
 
The US laboratory testing market has been valued at approximately $55 billion in which LabCorp has about 9% market share. Demand should continue to grow due to the increasing aging population, increased recognition of the value of more specialized and sophisticated tests in genomics and proteomics and the low-cost benefits of testing for health improvement.
 
Magnitude of Estimate Revisions
 
The magnitude of revisions is modest following first quarter results. Overall, estimates for the second and third quarters have gone up a penny to $1.42 and $1.39, respectively. However, the outlook is not so rosy for fiscal 2010 and 2011, whose estimates have been lowered by a penny.
 
Our Recommendation
 
LabCorp continues to focus on strategic initiatives to drive growth and profitability. It includes introduction of innovative tests in the genomic/esoteric arena, specifically in the area of cancer, and a greater focus on managed care organizations in addition to aggressively pursuing the hospital market. The company is increasing its focus on the high-margin esoteric testing business which accounted for 36% of its revenues in 2009.
 
We have a Neutral recommendation on the stock given the strong potential of the company, which is also supported by the Zacks Rank #3 (Hold).
 
About Earnings Estimate Scorecard
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