Laboratory Corporation of America

[tucker]

Laboratory Corporation of America (LH)
Recent Price: $73.00
Revenue: $4.07bil
Market Cap: $8.07bil
EPS: $3.93
Shares Outstanding: 110.5mil
P/E: 18.57
Avg. Volume: 1,242,020
Dividend: --
Book Value: $15.54
Yield: --

Laboratory Corporation of America (LabCorp) is the second largest independent clinical laboratory company in the United States, with 37 primary laboratories and 1,600 patient service centers spread over all 50 states. Through a joint venture with Dynacare, the company also operates labs in Alberta and Ontario, Canada. LabCorp offers testing services to physicians, hospitals, managed care organizations, governmental agencies, employers, pharmaceutical companies, and other independent clinical laboratories. Offered tests include routine medical diagnostics (e.g. blood chemistry analyses, urinalyses, blood cell counts, thyroid tests, Pap tests, HIV tests, and microbiology cultures), forensic identity testing used in criminal proceedings, allergy testing, and drug abuse detection screening. Among LabCorp’s blood chemistry analyses are test that allow medical professionals to detect environmental pollutants in human blood, and thus help regulate exposure to toxic chemicals. LabCorp is a leader in genetic screening for predisposition to disease, which can help medical professionals stop diseases in individuals before symptoms appear. As the focus on health care in the US continues to move from treatment to prevention, genetic screening is expected to be an area of particularly strong growth.

LabCorp is essentially an outsourcing company. However, outsourcing in medical diagnostics may be beneficial to both patients and providers. As more diagnostics become available and existing diagnostics become more sophisticated, hospitals and physicians are finding it more and more difficult to do all testing onsite. Moreover, while LabCorp’s work is outsourced from other health care providers, the work is done at one of several hundred testing centers nation wide. Thus, the company may help clients to save on physical overhead and expenses without removing jobs locally.

Over the past 10 years LabCorp has grown rapidly, with mean annual revenue growth of 9.7% and mean annual EPS growth of 22.9%. Growth has been both organic (mostly in the form of geographic expansion) and by acquisition. At this point, there is little room for further geographic growth and there are few independent labs left to acquire, and analysts expect industry growth in the mid single digits. Continuing growth in LabCorp is expected to come from three sources:

1) In October of 2006 LabCorp signed a ten-year deal with UnitedHealthcare (UNH), the second largest US health insurer, which it won over from competitor Quest Diagnostics. LabCorp lost a contract with Aetna, the third largest US health insurer, to Quest about five months later, but the relative size of the two contracts should give a net boost to LabCorp. Moreover, while gains from the exchange began in 2007, they should continue over the next two years as LabCorp builds out the facilities it will need to handle the full UNH business. Note though that the two deals are indicative of increasing competition and pricing pressure that characterize the industry and may weigh on future earnings growth.

2) LabCorp expects to increase higher-margin esoteric testing from 34% to 40% of business over the next several years.

3) LabCorp has a strong record of share buybacks. In 2007 the company bought back 13 million shares, more than 10% of its outstanding shares. The current buyback program is funded for more than 5 million more shares, and future buybacks may be authorized. By reducing the number of shares outstanding, the company is able to increase earnings per share.

Weighing these three sources against pricing pressure and limited room for geographic expansion, analysts project growth of 14% to 15% annually over the next five years. Based on current earnings and the company’s mean historical P/E of 17.5, a fair current price for the LabCorp shares might be near $92.50.