LabCorp (NYSE:LH), along with a main rival, control a high percentage of the domestic lab testing market. One would think this dominance would translate into solid growth potential, but challenging industry conditions could keep overall growth constrained going forward.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

First Quarter Recap
Revenues advanced 4% to $1.4 billion. Management attributed the increase to 2.8 percentage points of volume increases and 1.2 percentage points of higher pricing, or revenue per requisition. About 41% of LabCorp's tests stemmed from higher margin genomic, esoteric and related revenue. It has a goal to boost this to 45% of sales within the next five years.

Cost controls helped send operating income up by nearly 22% to $287.1 million. This represented a solid operating margin of 20.5% of revenues. Lower interest expense helped send net income up by 27.1% to $161.6 million, or $1.63 per diluted share. Backing out some costs management felt were not recurring or reflective of its underlying operations, adjusted earnings were $1.74 per diluted share and up 14.4% from last year's first quarter. Free cash flow declined 12.4% to $162.9 million to slightly exceed reported income.

SEE: Understanding The Income Statement

Outlook and Valuation
For the full year, LabCorp said to expect revenue growth of between 2 and 3.5%. Analysts currently project top line growth of about 3% and total revenues just shy of $6 billion. Looking at the competitive landscape, Quest Diagnostics (NYSE:DGX) will log a similar level of sales growth and total sales of nearly $8 billion. Smaller rivals include Bio-Reference Labs (Nasdaq:BRLI) and Medtox (Nasdaq:MTOX), both of which are projected to report double-digit sales growth and total sales of $662 million and $119 million, respectively.

The company projects adjusted earnings in a range of $6.75 and $7.05 per share and free cash flow of almost $800 million, or approximately $8 per diluted share. At the current share price of $86.91, the forward P/E is 11.5 and forward free cash flow multiple is 11.

The Bottom Line
LabCorp pegs the total U.S. lab testing market at $55 billion, giving it a market share of above 10%. Combined with Quest, these two largest players control a quarter of the market. Hospitals including HMA (NYSE:HMA) and HCA (NYSE:HCA) collectively dominate most of the rest of the market.

The consolidated market is making it difficult for LabCorp to grow as rapidly as it once was. Additionally, it is feeling pressures from large health insurers and the government, both of which are using their clout to drive down pricing. These tough operating conditions will likely keep growth constrained, but LabCorp remains firmly profitable and a generator of tons of annual free cash flow.

SEE: 5 Must-Have Metrics For Value Investors

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center