Laboratory Corporation of America Holdings (LH) is one of the two largest independent U.S. clinical laboratories. The stock carries S&P Capital IQ's highest investment recommendation of 5-STARS, or Strong Buy, notes analyst Paige Meyer in CFRA Research's flagship newsletter, The Outlook.
LH provides comprehensive clinical laboratory and end-to-end drug development services through its two business segments: LabCorp Diagnostics (LCD) and Covance Drug Development (CDD).
We anticipate 2021 sales will rise 2%, driven by gradually declining Covid-19 testing volumes as vaccines are widely distributed, paired with a strong recovery in base business testing revenues in the second half of the year.
We anticipate base business revenues will grow around 12% year-over-year, more than offsetting a 45% decline in Covid-19 testing volumes due to the scale of the base business relative to Covid-19 testing.
The pandemic provided a strong boost to LH's bottom-line in 2020, as testing was key to curbing the spread of the virus. LH developed its PCR test, which detects the presence of the virus, on March 5, 2020, and gradually ramped up throughput throughout the year.
LH performed approximately 35 million Covid-19 tests in 2020, which represents about 31 million PCR tests and more than 4 million antibody tests. As of February 25, 2021, the company had the capacity to perform 275,000 PCR and 300,000 antibody tests per day.
The CARES Act, passed by Congress in 2020, temporarily suspended certain provisions of the Protecting Access to Medicare Act (PAMA), which originally allowed reimbursement for lab tests to be cut from 2018 to 2020 by a maximum of 10%, and by up to 15% from 2021 to 2023.
In addition, the Senate passed a bill in March 2021 to extend the suspension of Medicare sequestration (a 2% across-the-board cut to all Medicare payments) through the end of 2021. For the near term, these temporary suspensions should help margins in 2021, in our view.
We forecast EBITDA margins of 23.3% in 2021 and 18.3% in 2022. For the longer term, we think reimbursement cuts have disproportionately affected small labs, which creates attractive acquisition opportunities for LH.
We think that opportunistic lab acquisitions will be a key driver of LH's growth in the next few years, post-pandemic. Overall, LH stands to benefit from its rapidly growing Covid-19 testing capacity and in the longer term, its base testing business, which conducts 530 million tests a year.
Though LH has lower base testing volumes during the pandemic, government support is likely to offset much of the lost earnings, in our view. Our 12-month target price of $288 is based on 10.0x EV to our 2021 EBITDA estimate, a premium to LH's historical forward average.
Risks to our recommendation and target price include weaker-than-expected volume growth, limited opportunities to acquire small labs, and worse-than-expected margins from pricing pressures.