GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

LabCorp: A Leading Independent Diagnostic Laboratory

August 22, 2014 | About:
ovenerio

ovenerio

5 followers

In this article, let's take a look at Laboratory Corp of America Hldgs (LH), a $9.07 billion market cap company, which is a clinical laboratory organization that offers a broad range of clinical tests through a national network of laboratories.

Key drivers for growth

LabCorp participates in a duopoly with promising outlook as health care moves toward reformed payment models. The hospitals still dominate the diagnostic market, and LabCorp. makes acquisitions in order to gain scale and increase efficiency. The company focuses on expanding through acquisitions. Acquiring other laboratories and trying to reduce the high fixed-cost component of operating them is crucial to remain profitable in the future.

The acquisition’s strategy started with MuirLabs, focusing on adjacent fields such as central lab testing for clinical trials. Also, it acquired Medtox Scientific that will bring the expertise in specialized toxicology testing. Other acquisitions include Orchid Cellmark, Westcliff Medical Laboratories and Genzyme Genetics.

LabCorp. can continue with this strategy because there are plenty of clinical labs that can be acquired.

Investments

The firm has invested in automation and systems in order to reduce costs because the number of employees involved in running the tests will be reduced. Also more investments in its information technology capabilities, has resulted in greater ease for physicians to access test information in a timely manner.

LabCorp runs tests on 470,000 specimens every day at a lower cost than almost all the hospitals, doctors' offices and smaller independent labs.

Outlook

The lab should take advantage of promising long-term trends in the diagnostics industry. We imagine that the coming years will be characterized by new tests and new advances are going to be discovered.

Additionally, new reimbursement models will come out by the health-care reform that should boost revenues because more doctors and hospitals are going to send tests.

Revenues, margins and profitability

Looking at profitability, revenue growth by 3.28% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.64 vs $1.62). During the past fiscal year, the firm increased its bottom line by earning $6.24 versus $5.98 in the prior year. This year, Wall Street expects an improvement in earnings ($6.71 versus $6.24).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

LH

Laboratory Corp.

23.03

BRLI

Bio-Reference Laboratories Inc.

16.87

DGX

Quest Diagnostics Inc

21.5

 

Industry Median

3.6

The company has a current ROE of 23.03% which is higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Bio-Reference Laboratories Inc (BRLI) and Quest Diagnostics Inc. (DGX) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

1408715275982.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 17.8x, trading at a discount compared to an average of the industry. To use another metric, its price-to-book ratio of 3.41x indicates a discount versus the industry average of 4.38x while the price-to-sales ratio of 1.61x is below the industry average of 4.42x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $15,328, which represents a 9% compound annual growth rate (CAGR).

1408715206601.png

Final comment

As outlined in the article, the company´s focus on acquisitions that help it to reach efficiency and the policy of investments to reduce costs are key drivers for future growth. Moreover, the PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock..

Hedge fund gurus like Tom Gayner (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), John Rogers (Trades, Portfolio), Charles Brandes (Trades, Portfolio) and Wallace Weitz (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

Rating: 2.0/5 (2 votes)

Voters:

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK