Leading lab-testing company Laboratory Corporation of America Holdings (LH) reported an EPS of $1.26 in the fourth quarter of fiscal 2010 compared with the year-ago quarter’s $1.33. However, after adjusting for restructuring and other special charges, the EPS came in at $1.34, ahead of the Zacks Consensus Estimate of $1.31 and the year-ago quarter’s $1.16.
For the full year, the adjusted EPS was $5.55, surpassing the Zacks Consensus Estimate by a penny and $4.89 in the previous year.
Revenues during the quarter increased 11.2% year over year to $1,295.4 million, ahead of the Zacks Consensus Estimate of $1,251 million. Both testing volume (measured by requisitions) and revenue per requisition increased 3.6% and 7.3%, respectively. For 2010, revenues came in at $5003.9 million, up 6.6% and surpassing the Zacks Consensus Estimate of $4,957 million.
While gross margin during the quarter remained unchanged at 40.9%, adjusted operating margin improved by 40 basis points to 19.5%. LabCorp’s interest expense increased 31% during the quarter due to higher debt burden.
The company had raised $925 million in November 2010, primarily to fund the acquisition of Genzyme Genetics, a unit of Genzyme Corporation (GENZ).With the acquisition of Genzyme Genetics, LabCorp expects to strengthen its esoteric testing and personalized medicines business.
LabCorp exited fiscal 2010 with cash and short-term investments of $230.7 million, up 55% compared to $148.5 million at the end of December 2009. In January 2011, the company completed its previous repurchase authorization by purchasing $234.2 million of stock. However, LabCorp has announced another $500 million of buyback program.
Outlook
LabCorp provided its outlook for 2010. The company plans to bring in some changes in its adjusted EPS guidance by excluding intangible amortization associated with acquisitions. The company expects to record adjusted EPS of $5.62-$5.82 (EPS excluding amortization: $6.12-$6.32) on a 9.5%-11.5% revenue growth.
While the Zacks Consensus Earnings Estimate of $5.89 is much higher than the company’s guidance, the revenue expectation of $5,506 million is within the range. In addition, operating cash flow and capital expenditure is expected to be $900 million and within $140-$150 million, respectively.
Recommendation
LabCorp continues to focus on strategic initiatives to drive growth and profitability. While companies in the diagnostic space have been witnessing challenges in the form of pricing pressure and lower volume, but situations are not that bad. In this respect, positive volume growth after several quarters recorded by LabCorp’s prime competitor, Quest Diagnostics (DGX) further ascertains our view.
LabCorp has strong balance sheet based on which the company is looking forward to suitable acquisitions in the esoteric business and expanding its reach. However, the tough competitive landscape is of primary concern, especially in the current economic scenario.
We currently have a Neutral recommendation on the stock, which also corresponds to the Zacks #3 Rank (Hold).
QUEST DIAGNOSTC (DGX): Free Stock Analysis Report
GENZYME-GENERAL (GENZ): Free Stock Analysis Report
LABORATORY CP (LH): Free Stock Analysis Report
Zacks Investment Research
