LabCorp: Clinical Gains

07/19/2016 7:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Our latest featured stock is one of just two national laboratory operators, benefits from pricing power and the current environment of rising medical utilization, notes Richard Moroney, editor of Dow Theory Forecasts.

Although hospitals still conduct about half of clinical lab work in the US, they increasingly outsource testing to companies like Laboratory Corp. of America (LH).

The US accounts for 82% of revenue and Canada 5%, limiting LabCorp’s exposure to the uncertainty gripping Europe after the United Kingdom voted to leave the European Union.

Over the years, LabCorp has aggressively snapped up smaller labs to push its share of the US lab market to 11%.

The company took a new direction in February 2015, paying $6.15 billion to acquire Covance, a contract research organization (CRO) that tests drugs for pharmaceutical companies.

The deal reduced LabCorp’s exposure to managed-care providers, Medicaid, and Medicare. LabCorp can also tap its database of 75 million patients to recruit subjects for clinical trials.

At 16 times trailing earnings, the stock trades in line with its five-year average but well below the median P/E of 21 for S&P 1500 health-services stocks.

If LabCorp earns $8.55 per share this year, the bottom of its projected profit range, and its trailing price-to-earnings ratio rises to 18, the shares will advance to $154 by early 2017.

The stock has risen 5% this year, well above the S&P 500’s 1% gain, yet still looks attractively priced and earns our long-term buy rating.

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