LabCorp Earnings: Solid Underlying Nonpandemic Test Demand Offsets Declines in COVID Tests

LabCorp LH delivered third-quarter results that closely track with our full-year topline expectations. Gross margin year-to-date has run slightly behind our projections, but that was partially offset by operational costs, which have run lower than we’d expected. These slight adjustments to our model weren’t enough to materially move our $233 fair value estimate. Narrow-moat LabCorp continues to put the COVID-19 disruption in the rearview mirror, and the quarterly decline in pandemic test revenue was comparable to that seen at rival Quest. Perhaps more importantly, LabCorp’s non-COVID quarterly test volume and price/mix were up 7% and 9%, respectively, year over year. While some of this strength relied on the new Ascension lab management deal, base business on these measures remained decent on an organic basis. We think this growth suggests solid underlying dynamics for reference labs heading into 2024.

Now that LabCorp has divested its later-stage contract research organization, the firm has returned more focus to the diagnostic lab area, which has shown up in a string of hospital outreach and lab management deals with Tufts Medicine and Legacy Health, among others. We view this as a favorable sign that LabCorp is going to more aggressively pursue the types of arrangements that Quest has made a priority over the last five years. While lab management deals aren’t as economically attractive as the outreach deals, we’ve seen that the former can still be appealing and accretive for the reference labs. With hospitals under financial pressure and looking to enhance efficiency, working with LabCorp or Quest to manage lab assets and leverage both the buying power and reference labs of these giants should improve cost-per-test for the hospital labs.