Recently, we reiterated our Neutral recommendation on Laboratory Corporation of America Holdings (LH) with a target price of $92.00.
During the fourth quarter of 2010, revenue increased 11.2% to reach $1,295.4 million compared to the year-ago quarter, of which 3% came from the acquisition of Genzyme Genetics. Both testing volume (measured by requisitions) and revenue per requisition increased 3.6% and 7.3%, respectively.
The growth in revenue per requisition is attributable to acquisitions, rate increases, test mix shift and increase in test per requisition. Genzyme Genetics accounted for approximately 2.5% of the growth in revenue per requisition and 0.3% of volume growth.
LabCorp has been focusing on increasing its revenues from esoteric testing. During the fourth quarter, 37% of revenues came from genomic, esoteric and anatomic pathology categories. Banking on the acquisition of Genzyme Genetics, LabCorp expects to achieve its targeted 40% revenue from esoteric, genomic and anatomic pathology testing in the first quarter of fiscal 2011.
The company plans to record about 45% of its revenues from this business in the next 3-5 years. During the reported quarter, esoteric volume increased 5.5% compared to the year-ago period. It is encouraging to note that LabCorp witnessed sequential improvement in Empire volume during the quarter.
Beginning August 2010, the company became a member of Empire BlueCross BlueShield of New York’s lab network, which provides a solid growth opportunity in the New York metropolitan area.
LabCorp exited fiscal 2010 with cash and short-term investment of $230.7 million ($148.5 million at the end of 2009) and $460 million under its revolving line of credit. The company has been using its cash balance to make strategic acquisitions as well as reward its shareholders through share repurchases.
Although no shares were repurchased during the fourth quarter due to the acquisition of Genzyme Genetics, in January 2011, LabCorp completed its previous share buyback program and announced a new $500 million buyback program.
However, the prevailing economic uncertainty is taking its toll on physician office visits. Moreover, volumes remain under pressure due to the high number of uninsured and unemployed individuals. LabCorp also faces intense competition from its major competitor, Quest Diagnostics (DGX), which is also focusing on increasing its share in the esoteric testing market.
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