RossHelen
Shares of Laboratory Corporation (NYSE:LH) have continued to trade around the $200 mark, for quite a few years now, after the company was a relatively modest beneficiary of the pandemic, at the time boosting demand for its diagnostics solutions.
Facing headwinds from the subsequent decline in these testing revenues, and amidst some moving parts in the business itself, the picture looks a bit uneven based on the reported results, although that growth should return from here, at least that is the promise for 2024.
All this makes me cautiously upbeat on LabCorp, trading at a modest valuation while the business posts steady growth, driven by a good positioning, making the long-term appeal look decent enough here.
A Small Deal
Towards the end of the first quarter, LabCorp announced a bolt-on deal as it has reached a deal to acquire BioReference Health from troubled OPKO Health (OPK).
With this transaction, LabCorp will acquire BioReference Health’s laboratory testing business, which focuses on clinical diagnostics and reproductive and women’s health across the majority of the US. The deal furthermore includes so-called patient service centers of the business.
The assets are acquired in a $237 million deal, contributing about a hundred million in revenues, implying that a 2.4 times sales multiple has been paid, with no other financial details being announced on the deal.
A Modest Addition To A Big Lab Player
LabCorp claims to be the largest laboratory service provider in the world, performing over 600 million tests per annum, with more than 6,000 unique tests being available.
The company caters to pretty much all the large pharmaceutical names, as the number of tests performed creates huge and valuable datasets, as well as input for scientific publications. The need for diagnostics is clear, evident, and growing, as the core diagnostics segment complements the smaller biopharma lab service segment
By mid-February, LabCorp announced its 2023 results, a year in which revenues rose by about 2.5% to $12.16 billion, as this revenue number shows that the deal with OPKO really is a bolt-on deal, adding just below 1% to pro forma sales. About three-quarters of total revenues are generated from the Diagnostics Laboratories business, and the remainder from Biopharma Laboratory services. Note that this is still a very labor-intensive business, as the company employs some 60,000 workers across the globe.
While revenues were up in a modest fashion, margins took a beating. The company posted full-year adjusted earnings of $13.56 per share, down substantially from a $16.66 per share number in 2022, as trends were even worse on a GAAP basis with earnings down to $4.04 per share (after no less than 9 adjustments made to earnings). Fourth quarter numbers showed a big improvement in momentum, aided by the acquisition of certain selected assets of Legacy’s outreach laboratory business.
Net debt is reported at $5.1 billion here, with adjusted EBITDA seen around $2.1 billion, for a leverage ratio around 2.5 times, which is ahead of the bolt-on deal with OPKO.
For 2024, the company guided for adjusted earnings to improve from $13.56 per share to $14.30-$15.40 per share, driven by about 5%, and change expected growth in terms of sales. Based on these earnings numbers, a $208 per share number looks quite modest at around 13-15 times forward earnings, yet that is based on very adjusted earnings, as the reconciliation is both recurring and plentiful in the number of items.
A Small Recap
I last covered LabCorp in the summer of 2023 when the company aimed to create value by spinning out Fortrea (FTRE), a $3 billion CRO business that generated some $400 million in EBITDA at the time.
The idea was to create more value from spinning off this other business, as LabCorp might benefit from the lapsing of the pandemic, and the headwinds that resulted post the pandemic for diagnostics firms, including LabCorp.
Amidst a non-demanding valuation and reasonable leverage, appeal was evident, although the company has not really lived up to its expectations (at least what might have been reasonable given this positioning). Given this background, I concluded to become a buyer on dips, with shares trading at $210 at the time.
Shares fell below the $200 mark in 2023, but I never ended up buying the shares, which nearly two years later traded dead flat at $210 per share. Of course, Fortrea has become a standalone entity (after a one-for-one exchange ratio), with that business now trading at $40 per share.
And Now?
The truth is that the last Covid-19 headwinds really should disappear in 2024, with further declines in testing volumes only affecting overall revenue growth by a percentage point, or so.
This makes that headwinds are on the retreat as this opens the door for revenue growth in 2024, and this could result in potential valuation multiple inflation, this being a stock trading at just 14 times (albeit adjusted) earnings.
That being said, shares have traditionally not commanded a premium valuation, so a quick re-rating should not be expected. The combination of a modest valuation (expectations) and reasonable sales growth on a per-share basis should drive the long-term investment case, certainly if opportunities to buy the dip might arise.
