CRA Celera Corp. (MM)

Leading lab-testing company Laboratory Corporation of America Holdings (LH) reported adjusted EPS of $1.52 (excluding amortization, restructuring and other special charges) for the first quarter of fiscal 2011.

That was way above the Zacks Consensus Estimate of $1.44 and the previous year's adjusted EPS of $1.40.

Moreover, severe weather had a negative impact of 8 cents on the EPS.

Revenues increased 14.6% year over year to $1,368.4 million, ahead of the Zacks Consensus Estimate of $1,325 million. Testing volume (measured by requisitions) and revenue per requisition increased 5.9% and 8.2%, respectively. Results for the reported quarter include the operations of Genzyme Genetics, acquired in the fourth quarter of 2010.

Gross margin during the quarter declined 100 basis points to 41.5%. Moreover, a 15% rise in selling, general and administrative expenses led to a 110-basis point decline in adjusted operating margin to 19.3%. LabCorp’s interest expense increased 64% during the quarter due to higher debt burden.

The company had raised $925 million in November 2010, primarily to fund the acquisition of Genzyme Genetics. With the acquisition of Genzyme Genetics, LabCorp expects to strengthen its esoteric testing and personalized medicines business.

LabCorp exited the quarter with cash and short-term investments of $195.4 million, compared to $230.7 million at the end of December 2010. During the quarter, the company repurchased 2.9 million shares for $265 million and was left with $469 million of authorization.

Outlook

LabCorp reiterated its revenue guidance (9.5%-11.5% growth) for fiscal 2011. However, it raised its adjusted EPS guidance to $6.17−$6.32 (previous guidance of $6.12-$6.32). In addition, operating cash flow and capital expenditure is expected to be $900 million and within $140-$150 million, respectively.

Recommendation

LabCorp continues to focus on strategic initiatives to drive growth and profitability. It includes introduction of innovative tests in the genomic/esoteric arena (specifically in the area of cancer), a greater focus on managed care organizations, and aggressive penetration into the hospital market. The company is focusing more on the high margin esoteric testing business, and has set a target of recording 45% of its revenues from this specialty business in the next 3-5 years.

However, the tough competitive landscape is of primary concern, and the leading diagnostic players are all striving for a greater share in the high margin, specialized testing business. In this regard, Quest Diagnostics (DGX) recently acquired Athena Diagnostics, which is involved in diagnostic tests for neurological conditions, and is also in the process of acquiring Celera Corp (CRA).

We currently have a Neutral recommendation on the stock, which also corresponds to the Zacks #3 Rank (Hold).

 
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