LabCorp Passes the Test

By Ryan C. Fuhrmann | February 02, 2012 AAA

Lab testing firm LabCorp (NYSE:LH) closed out its fiscal year on a down note, with profit growth below historical levels. However, its long-term track record remains intact, and the valuation is reasonable.

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Full Year Recap
Revenues advanced 10.8% to $5.5 billion and consisted of a combination of organic growth and acquisitions. Organically, testing volumes increased 1.2% and higher pricing through revenue per requisition, which increased 4.2%. Management detailed that it is in the process of integrating its "Westcliff, Orchid Cellmark and Genzyme Genetics acquisitions."

Operating income fell 3.1% to $948.4 million as LabCorp took more than $160 million in amortization, restructuring and other special charges. Backing out these charges, management estimated that operating income actually improved by 4.8% to $1.1 billion. Net income fell 6.9% to $519.7 million as higher interest expenses ate into the bottom line. This worked out to $5.11 per diluted share. Again, backing out charges, management detailed that earnings advanced 6.5% to $6.37 per diluted share. Free cash flow fell 6.2% to $709.9 million, or approximately $7 per diluted share. (To know more about income statements, read Understanding The Income Statement.)

Outlook
For the coming year, LabCorp expects revenue growth of 2 to 3.5%. Analysts currently project $5.6 billion in sales for 2012. The company projects $6.75 to $7.05 and free cash flow of around $800 million, or $7.85 per diluted share.

The Bottom Line
LabCorp's stock has recovered from the depths of last fall, when it declined to less than $75 per share. However, at $90 per share, the shares are still well below highs of more than $100 in mid-2011. At the current price, they trade at a reasonable forward P/E of 13, and even more reasonable forward free cash flow multiple of only about 11.2.

Despite having largely consolidated the market for independent lab testing firms, LabCorp appears able to continue growing profits at a double digit clip. Over the past five years it has been able to leverage annual sales growth of less than 9% into an annual earnings growth of more than 14%. This easily bests archrival Quest Diagnostics (NYSE:DGX), which has grown sales 6% and profits less than 9% over this same period.

Hospitals, including HCA Holdings (NYSE:HCA) and Health Management Associates (NYSY:HMA), still garner the lion's share of testing volumes throughout the country. Bio-Reference Labs (Nasdaq:BRLI), a lab tester in the eastern United States, has managed to grow sales and profits in excess of 20% and may offer a better combination of growth potential at a reasonable valuation, with a forward P/E of 12. But LabCorp is likely a safer bet given its geographic diversity and strong track record of managing its business for growth. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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

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