Company Reports

Labcorp delivered a solid first-quarter performance that tracked closely with our full-year expectations for the top and bottom lines. We’ve made minimal adjustments to our assumptions and are leaving our fair value estimate unchanged. The strength in medical utilization seen in recent quarters seems to have continued through the first quarter, leading management to raise its outlook for the diagnostic lab business (along with the incorporation of recent acquisition activity). Our projections for 2024 are bounded by management’s revised outlook, and we remain confident of the firm’s narrow economic moat supported by a cost advantage.

Narrow-moat Labcorp posted solid fourth-quarter results, and full-year performance largely fell in line with our expectations. Though cost of goods sold came in slightly higher than expected, this was offset by lower sales and marketing expense; as a result, we’re leaving our fair value estimate unchanged. Fourth-quarter COVID-19 PCR revenue was down 73%, but base business sales more than compensated with 7% growth. As the largest COVID declines are now behind Labcorp, we anticipate 2024 should see generally normalized growth. In keeping with its historical diagnostic focus, the firm continues to prioritize the faster-growing esoteric test areas, including oncology and neurology.

LabCorp 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.

LabCorp delivered solid second-quarter results that offered the first peek into what LabCorp’s financials look like following the spinoff of the Fortrea drug development business. While the remaining biopharma lab services revenue is slightly smaller than we’d expected, this was largely offset by stronger growth in the diagnostic lab segment that we anticipate should continue through the year, as well as a slightly higher long-term earnings growth profile now that the lower-margin drug development business has been shed. As a result, we’re leaving our fair value estimate unchanged. We remain confident in LabCorp’s compelling cost structure that underpins its narrow economic moat. This firm has long been a superior operator in the reference lab industry, in our view. We expect this dynamic to become more evident again as the firm refocuses on diagnostic labs.

We've lowered our fair value estimate on narrow-moat-rated LabCorp to $233 per share, down from $271, after adjusting for the spinoff of the drug development business.

As a leading independent diagnostic laboratory, LabCorp participates in a highly attractive duopoly that offers favorable prospects as healthcare moves toward reformed payment models, the easing of Medicare headwinds and potentially positive M&A opportunities.

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.

LabCorp delivered full-year performance that generally hit our projections, with revenue of $14.9 billion hitting our estimate nearly on the nose. Although operating expenses were slightly lower than we’d expected, this had an immaterial effect on our valuation, and we’re holding steady on our fair value estimate. With the spinoff of LabCorp’s drug development arm on the horizon (now formally known as Fortrea), we think the remaining diagnostics business can still easily justify LabCorp’s narrow economic moat on the basis of cost advantage. LabCorp, along with Quest Diagnostics, will still be the two largest labs, by far. We see no factors that would impinge upon LabCorp’s ability to conduct tests that, on average, amount to roughly one third of what they cost at the hospital-based lab.

LabCorp’s third-quarter results fell short of FactSet consensus expectations and management slightly dialed down its outlook causing shares to bobble. Though we’ve made incremental adjustments to our expectations for the full year, these changes weren’t material enough to shift our $271 fair value estimate. We were pleased to see the firm make progress on its planned spinoff of the drug development business, which is now likely to take place sooner than expected in mid-2023. Nonetheless, we are confident the soon-to-be standalone LabCorp’s narrow economic moat remains intact. We see little to change our view of the cost advantage LabCorp enjoys (along with rival Quest Diagnostics) in its reference lab segment thanks to its outsize scale that smaller independent labs have failed to replicate.

As a leading independent diagnostic laboratory, LabCorp participates in a highly attractive duopoly that offers favorable prospects as healthcare moves toward reformed payment models, like the easing of Medicare headwinds and potentially positive M&A opportunities.

LabCorp’s second-quarter results generally met our expectations for continued softening in COVID-19 PCR tests. With these effects reverberating through the top and bottom lines, the firm remains on track to reach our full-year projections, and we’re leaving our fair value estimate unchanged. With quarterly diagnostic revenue down 4.7%, LabCorp’s performance in this segment was a hair worse than what was seen at rival Quest Diagnostics. Nonetheless, these results do not deviate significantly from our estimates for 2022, and we’re maintaining our assumptions. Perhaps the bigger news was the firm’s announcement that it would spin off its clinical drug development division (legacy Covance) in 2023. This news comes on the heels of the firm’s strategic review in 2021 that culminated in the decision six months ago to hold on to its drug development segment. At first blush, we see little to change our view of LabCorp’s narrow economic moat, as we think the firm’s significant cost advantage in its diagnostics business was compelling enough to warrant the moat even before its acquisition of Covance.

LabCorp posted first-quarter results that were generally consistent with our expectations, and we’re holding steady in our fair value estimate, as nothing in the quarter prompted us to materially change our underlying assumptions. We remain confident in the firm’s narrow economic moat, as LabCorp continues to benefit from its scale-derived cost advantage. Nonetheless, we expect near-term profitability to be constrained by ongoing pressure from labor and transportation costs as well as decisions about how much excess capacity to carry in the event another COVID-19 variant emerges.

LabCorp posted full-year results that ran ahead of our expectations on the top and bottom lines for 2021. However, that outperformance was offset after adjusting our 2022 projections downward as demand for COVID-19 testing wanes, and we’re standing behind our $271 fair value estimate. LabCorp’s 10% revenue decline in the fourth quarter, which reflected COVID-19 test revenue falling 15% year over year, was modestly better than we’d expected thanks to 5% growth in nonpandemic tests. Despite the late fourth-quarter surge of the omicron variant, which drove up test demand that has spilled over into early 2022, we now expect COVID-related revenue to fall roughly 70% in 2022. However, robust growth of other tests should partially compensate for that decline. We saw little in the quarter to shift our thinking on LabCorp’s narrow moat.

As a leading independent diagnostic laboratory, LabCorp participates in a highly attractive duopoly that offers bright prospects as healthcare moves toward reformed payment models, despite current Medicare headwinds.

LabCorp’s third-quarter results outpaced our expectations on the top line thanks to the surge in the delta variant of the coronavirus, as well as nonpandemic test volume growing faster than anticipated. We’ve raised our fair value estimate to $271 per share from $247 after adjusting for a longer tail on demand for COVID-19 PCR tests, more robust return of nonpandemic diagnostic volume, and time value of money. LabCorp’s ability to handily absorb another surge in COVID-19 PCR test volume in August and September underscores our view of this firm’s enviable cost structure, which provides the basis for its narrow economic moat.

As a leading independent diagnostic laboratory, LabCorp participates in a highly attractive duopoly that offers bright prospects as healthcare moves toward reformed payment models, despite current Medicare headwinds.

Narrow-moat LabCorp delivered strong second-quarter results against a weak prior-year period, but this quarter also trended downward from the COVID-19-driven highs reached in late 2020 and early 2021. After making slight adjustments to our assumptions, we’re leaving our fair value estimate unchanged. While the pace of declines in COVID-19 testing remains a moving target, shifts in the second quarter largely fit into the pattern we’ve been expecting--resumption of non-pandemic tests on a see-saw with decreases in COVID-19 tests. COVID-19 test volume has consistently declined from its highs in early January through midyear. However, the pace of decline has been a bit slower than we’d projected. Additionally, management mentioned some stabilization in pandemic test volume in July, reflecting the spread of the Delta variant and rising viral transmission. Considering the current level of vaccination in the U.S., we now think our initial assumption of a 45% decline in 2021 COVID-19 testing was overstated and have dialed that back to 38%. This was offset by an incremental increase to our estimate for non-pandemic test volume.

LabCorp delivered another eye-popping quarter thanks to COVID-19 testing but has also begun to see softening in demand, in keeping with expectations for a deceleration in pandemic PCR testing through the second half of 2021. We’ve boosted our fair value estimate to $247 per share to reflect stronger growth in the non-pandemic testing and the drug development business than we’d expected. The impact of the pandemic has only underscored LabCorp’s significant cost advantage that provides the basis of its narrow economic moat. While quarterly diagnostic revenue rose 62% year over year, adjusted operating margin in this segment increased nearly four-fold, driven primarily by increased COVID-19 test volume.

As a leading independent diagnostic laboratory, LabCorp participates in a highly attractive duopoly that offers bright prospects as healthcare moves toward reformed payment models, despite current Medicare headwinds.

LabCorp saw another off-the-charts performance in the fourth quarter that exceeded our top- and bottom-line projections, but this is largely offset by our assumptions for a pullback in the diagnostic segment in 2021 as we move toward COVID-19 herd immunity. Therefore, we’re holding steady on our $209 fair value estimate. LabCorp has ridden the wave of COVID-19 testing, which thanks to relatively generous reimbursement has resulted in a bumper crop in 2020. As one of the largest independent labs, LabCorp ably demonstrated the value of its narrow economic moat, as it was able to increase capacity for SARS-CoV-2 PCR tests more quickly than smaller labs. In particular, the long-standing investments the firm has made in its information technology systems allowed LabCorp to more efficiently utilize its capacity, in our opinion, which also means it has been able to generally keep turnaround times low enough to meet Medicare requirements to receive full reimbursement.