Laboratory Corporation of America Holdings (LH) reported an adjusted EPS of $1.56 (excluding amortization, restructuring and other special charges) for the fourth quarter of fiscal 2011. The result was higher than the Zacks Consensus Estimate of $1.53 and the previous year's adjusted EPS of $1.46. For the fiscal, adjusted EPS came in at $6.37, ahead of the Zacks Consensus Estimate of $6.30 and $5.98 earned in the previous year. The current year takes into account full year of operations of Genzyme Genetics.
Revenues increased 5.5% year over year to $1,366.1 million, missing the Zacks Consensus Estimate of $1,375 million. Testing volume (measured by requisitions) and revenue per requisition increased 1.2% and 4.2%, respectively. For the full year, revenues increased 10.8% to $5,542.3 million, lagging behind the Zacks Consensus Estimate of $5,551 million.
Gross margin during the quarter declined 70 basis points (bps) to 40.2%. Adjusted operating margin, however, increased 60 bps to 20.4% with flat selling, general and administrative expenses.
LabCorp exited the fiscal with cash and short-term investments of $159.3 million, compared with $230.7 million at the end of December 2010 and with $560.0 million of borrowings outstanding under the $1.0 billion revolving credit facility. Operating cash flow for the quarter was $278.6 million.
The company has been using its cash balance to make strategic acquisitions as well as reward its shareholders through share repurchases. During the quarter, LabCorp repurchased 2.1 million shares for $172.1 million and was left with $84.4 million of authorization under the previously approved authorization plan. LabCorp also announced a new $500.0 million stock repurchase program.
In December 2011, after several months of negotiations with the Federal Trade Commission ("FTC"), LabCorp completed the acquisition of Orchid Cellmark for $85.4 million, all in cash. Orchid Cellmark provides DNA testing services targeted towards forensic and family relationship applications on a global basis. The FTC approval came with the rider that LabCorp would hive off certain assets of Orchid’s US government paternity business following completion of the transaction. The company recorded a net loss of $2.8 million on this divestment during the reported quarter.
Outlook
LabCorp provided its guidance for fiscal 2012. The company expects 2−3.5% revenue growth resulting in adjusted EPS of $6.75−$7.05 in the said fiscal. In addition, operating cash flow and capital expenditure are expected to be $950 million and $155 million, respectively. Genzyme Genetics is expected to be slightly accretive to 2012 earnings.
The company’s revenue guidance is lower than the current Zacks Consensus Estimate of $5,763 million representing an estimated 4% growth. However, the Zacks Consensus Estimate of $6.96 in earnings per share is within the guided range.
Recommendation
LabCorp, one of the leading clinical laboratories in the US, has of late put more and more emphasis on specialized testing. Riding on acquisitions made in the past few years, the company expects to record about 45% of its revenues from esoteric businesses in the next 3-5 years. Moreover, the growth in testing volume as well as revenue per requisition over the past few quarters was possible based on acquisitions, rate increases, test mix shift and increase in test per requisition.
However, physician office visits continue to remain on the downside. Given the soft industry trends, volume is expected to remain under pressure. The same scenario has affected LabCorp’s peer Quest Diagnostics’ (DGX) performance in the recently reported quarter. Consequently, we remain cautious about the near-term recovery in healthcare utilization trends. Given these challenges, the stock retains a Zacks #4 Rank (Sell) in the short term. Over the long term, we have a Neutral recommendation on LabCorp.
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