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Tickers in this Article: MTOX, BRLI, HMA, LPNT, THC
Medical laboratory testing firm MEDTOX (NYSE:MTOX) reported first quarter earnings on Wednesday that saw a modest sales boost, but a big drop in profits. The company may have appeal to a strategic acquirer that can wring out costs, but investors may want to stay on the sidelines. IN PICTURES: 9 Ways To Use A Tax Refund

First-Quarter Highlights
MEDTOX's sales improved a modest 2.4% to $21.2 million, but the company's higher-margin drugs-of-abuse testing products saw their first sales increase in the last six quarters to report a 4% increase for $8.8 million in quarterly revenue. This provides an indication that the job market is improving as the company's workplace clients test for drug abuse when hiring new employees. The clinical laboratory segment, which provides toxicology and related testing services, witnessed a nice 28% sales increase to $6.9 million, but was offset by a 65% decline in clinical trial services.

Gross profit improved 6% to $8.1 million, but a 27.5% rise in operating expenses served to push operating income down 86.2% to $118 million. Net income ended up falling 81.7% to $77 million, or one cent per share.

Outlook
Analysts expect full-year sales to increase 10.6% to $93 million and earnings of 46 cents per share. This would be more than triple last year's earnings of 15 cents per share, but still well below the 75 cents that MEDTOX reported in 2007.

Even though total sales have held steady, a down economy and product recall have adversely affected near-term earnings at MEDTOX. Additionally, operating cash flow tends to go primarily to capital expenditures to maintain the existing businesses and grow into new markets. This doesn't leave much excess cash flow to distribute to shareholders in the form of dividends and share buybacks.

Bottom Line
MEDTOX may have some strategic appeal to the other large lab-testing firms and even smaller players such as Bio-Reference Laboratories Inc. (Nasdaq:BRLI). A hospital, including Health Management Associates (NYSE:HMA), LifePoint Hospitals (Nasdaq:LPNT), or Tenet Healthcare (NYSE:THC) may also find some benefit to acquiring the firm to supplement its own testing segments. But at current levels, individual investors may want to wait on the sidelines for sales visibility to improve and for higher levels of profitability. (For more investment ideas, take a look at America's Top Dividend-Paying Stock.)

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