Laboratory Corporation of America Holdings (LH) reported earnings per share (“EPS”) of $1.63 in the first quarter of fiscal 2012 compared with $1.23 in the year-ago quarter. Adjusted EPS came in at $1.74 (excluding amortization, restructuring and other special charges), sailing past the Zacks Consensus Estimate of $1.68 and the previous year’s adjusted EPS of $1.52.

Revenues increased 4% year over year to $1,423.3 million, ahead of the Zacks Consensus Estimate of $1,404 million. Testing volume (measured by requisitions) and revenue per requisition increased 2.8% and 1.2%, respectively. A comparatively milder weather in the current year benefited LabCorp’s revenue and volume growth rate by 1.5%. Favorable weather also had a positive impact on LabCorp’s peer Quest Diagnostics (DGX) that reported a 2% benefit in revenue and volume growth during its first quarter earnings release yesterday.

Gross margin during the quarter declined 100 basis points (bps) to 40.5%. Adjusted operating margin, however, increased 50 bps to 21.4% aided by a 4.1% drop in selling, general and administrative expenses.

LabCorp exited the quarter with cash and short-term investments of $129.9 million compared with $159.3 million at the end of December 2011. At quarter end LabCorp had $460.0 million of borrowings outstanding under the $1.0 billion revolving credit facility. Operating cash flow for the quarter was $197.1 million.

The company has been using its cash to make strategic acquisitions as well as reward its shareholders through share repurchases. During the quarter, LabCorp repurchased 1.4 million shares for $122.3 million and was left with $462.1 million of authorization under the previously approved share repurchase plan. The company is satisfied with the acquisitions of Genzyme Genetics and Orchid Cellmark with the former expected to be slightly accretive to 2012 earnings.

Outlook

LabCorp reiterated its guidance for fiscal 2012. The company still expects 2-3.5% revenue growth resulting in adjusted EPS of $6.75-$7.05 in the said fiscal. In addition, operating cash flow and capital expenditure are expected to be $950 million and $155 million, respectively. The current Zacks Consensus Estimate for fiscal 2012 stands at EPS of $6.99 on revenues of $5,711 million, representing annualized growth of 3%.

Recommendation

The long-term fundamentals for the business remain strong with an ageing population and the prevalence of chronic conditions. LabCorp, one of the leading clinical laboratories in the US, has of late put more and more emphasis on specialized testing. Riding on acquisitions made in the past few years, the company expects to record about 45% of its revenues from esoteric businesses in the next 3-5 years.

Leveraging its strong balance sheet, LabCorp is intent on suitable acquisitions in esoteric testing. The growth in testing volume as well as revenue per requisition over the past few quarters was possible based on acquisitions, rate increases, test mix shift and increase in test per requisition. The stock retains a Zacks #2 Rank (‘Buy’) in the short term.

However, challenges remain in the form of decline in physician office visits and healthcare utilization trends. Over the long term, we have a Neutral recommendation on LabCorp.

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