Why Is LabCorp (LH) Down 22.5% Since Last Earnings Report?

A month has gone by since the last earnings report for LabCorp (LH). Shares have lost about 22.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is LabCorp due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Lower Medicare and Medicaid Pricing Dent LabCorp's Growth in Q4

LabCorp reported fourth-quarter 2019 adjusted earnings per share of $2.86, up 13.5% from the year-ago quarter. Also, the bottom line surpassed the Zacks Consensus Estimate by 2.1%.

The quarter’s adjustments exclude non-recurring items like venture fund investment related gains and loss on sale of certain assets, among others.

On a reported basis, net earnings were $2.32 per share, surging 48.7% from the year-earlier figure.

For 2019, adjusted EPS came in at $11.32, up 2.7% year over year. The figure beat the Zacks Consensus Estimate by 0.6%.

Revenues in the quarter under review grew 5.7% year over year to $2.95 billion. The top line also beat the Zacks Consensus Estimate by 0.7%.

The upside in revenues was driven by acquisition-related growth of 4.5% and organic growth of 2.3% (considering 0.9% adverse impact of lower Medicare and Medicaid pricing as a result of implementation of Protecting Access to Medicare Act or PAMA), partially offset by the disposition of businesses of 0.6% and negative foreign currency translation of 0.2%.

For 2019, revenues came in at $11.55 billion, up 1.9% year over year. The top line also beat the Zacks Consensus Estimate by 0.2%.

Quarter in Detail

In the fourth quarter, LabCorp Diagnostics reported revenues of $1.76 billion, reflecting a 3.7% uptick year over year. The upside primarily resulted from 0.8% organic growth and 3.5% contribution from acquisitions, offset by a 0.5% headwind from business dispositions. Organic revenue growth in the quarter was impacted by 1.5% due to the implementation of the PAMA.

Excluding business dispositions, the company witnessed a 2.6% rise in total volume (measured by requisition) and 1.6% improvement in revenue per requisition in the fourth quarter.

Covance Drug Development revenues improved 9.3% to $1.20 billion in the fourth quarter buoyed by a 6.0% contribution from acquisitions and 4.5% of organic growth, partially offset by a 0.9% impact owing to the disposition of the Covance Research Products business and 0.4% due to adverse foreign currency translation.

Margins

Gross margin grew 8 bps to 27.9% during the fourth quarter. Also, adjusted operating income rose 8.3% year over year to $407 million. However, adjusted operating margin expanded 30 bps from the year-ago quarter to 13.8%.

Cash Position

LabCorp exited 2019 with cash and cash equivalents of $337.5 million compared with $426.8 million in the year-ago period. Cumulative cash flow from operating activities at the end of 2019 was $1.44 billion, up from $1.31 billion a year ago. Additionally, free cash flow at the end of 2019 was $1.04 billion, up 13% from the year-ago period.

In the fourth quarter, the company returned $50 million to shareholders via share repurchases. LabCorp currently has $900 million of authorization remaining under its existing share buyback plan.

2020 Outlook

The company has provided its 2020 guidance.

Revenue growth has been estimated at 4.0% to 6.0% over 2019 revenues of $11.55 billion. The Zacks Consensus Estimate for current-year revenues is pegged at $11.93 billion.

Adjusted earnings estimate for 2020 has been estimated within $11.75 to $12.15 per share, suggesting an increase of 3.8% to 7.3% over 2019 adjusted earnings of $11.32. The Zacks Consensus Estimate for the same is pegged at $11.94 for the same.

Free cash flow is predicted to be $950 million-$1.05 billion (unchanged).

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months.

VGM Scores

At this time, LabCorp has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

LabCorp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.