LabCorp Earnings: COVID-19 Headwinds Partially Offset by Surprisingly Strong Base Business

LabCorp remained on the pandemic seesaw in the first quarter, as quarterly COVID-19 test revenue fell 18% year over year, and nonpandemic diagnostic revenue rose 14%. This made the 5% decline in overall diagnostic revenue slightly smaller than we’d anticipated but not material enough to shift our fair value estimate. With the impending spinoff of the drug development unit (named Fortrea) set for the coming months, we think LabCorp’s remaining diagnostics business will still enjoy a defensible narrow economic moat that stems from cost advantage. Considering LabCorp’s efficient lab footprint, consistent investment in upgrading information technology systems, and immense test volume, the firm should easily maintain its lower cost structure compared with the hospital-based labs.