Laboratory Corp.: Plenty Of Growth Runway (NYSE:LH)

While monopolies rarely exist in the business world, except for maybe regulated utilities, there are plenty of oligopolies. They can be found in different industries, like railroads, with Union Pacific (UNP) and CSX (CSX), as well as package deliverers UPS (UPS) and FedEx (FDX).

This brings me to the healthcare and specifically the lab testing industry. While hospitals still dominate this industry, they are highly fragmented. This leaves plenty of room for which the two largest players, Laboratory Corp. of America (NYSE:LH) and Quest Diagnostics (DGX), to grow.

As shown below, LH has done well over the past 5 years, but investor exuberance has worn off since early last year, when the share price reached over $300. In this article, I highlight why Labcorp is currently a buy, so let’s get started.

Why Labcorp?

Labcorp is member of the S&P 500 and a leading global life sciences solutions provider that guides patient care through its comprehensive clinical laboratories and provides end-to-end drug development services for leading pharmaceutical companies. It has a presence in over 100 countries, and its clients include hospitals and healthcare systems, pharmaceutical companies, research institutions, physicians, and patients.

LH benefits from its extensive network of patient service centers and laboratories which number nearly 2,000. This allows the company to provide convenient, accessible diagnostic services to patients and healthcare providers across the country. Additionally, Labcorp’s wide range of diagnostic services, including clinical, pathology, and genetic testing positions the company as a one-stop-shop for laboratory services, making it a preferred provider for many healthcare providers.

It’s no secret that LH and its close peer, Quest Diagnostics, largely benefited from COVID testing since early 2020. Much of this windfall, however, is wearing off, as the global pandemic is gradually easing into an endemic, as most individuals having been vaccinated and / or had a previous infection. Plus, the prevalence of at home testing has diminished the need for PCR testing.

This shift is reflected by revenue declining by 12% YoY to $3.6 billion during the third quarter, driven largely by a tough comparison to the prior year period when COVID testing was in full swing. Nonetheless, Labcorp made good use of its momentum over the past two years to bolster its positioning. This includes the recent acquisition of select laboratory assets from Ascension hospitals across 10 states, enabling LH to expand comprehensive services for patients and healthcare providers.

Moreover, LH is far from being a one trick pony as it’s been investing heavily in technology and automation, with the goal of improving efficiency and reducing costs. This includes reducing amount of time needed to run and sort tests, thereby providing patients with easy access to test information in a timely manner.

Looking forward, LH has plenty of growth runway as hospitals increasingly seek to outsource this essential function to testing providers that can do it more efficiently and cost effectively than they can. Moreover, LH is expanding its positioning in the fast growing oncology and neurology spaces, which is more profitable than traditional testing. Management sees plenty of value add opportunities in this space, as highlighted during the last conference call:

We’re furthering our position as a leader in this space through the addition of new testing and screening capabilities. We continue to see benefits from the Personal Genome Diagnostics, an omni portfolios, including their leading liquid biopsy, tissue-based diagnostics and kitting solutions. We have the broadest portfolio and capabilities in oncology diagnostics today, and we are well positioned for growth.

In addition to our progress in oncology, Labcorp is relentlessly focused on innovating and delivering our customers valuable solutions across all areas to help them achieve their goals. We enhanced our neurology offering in the quarter through the launch of a pan-neoplastic and other neuro autoimmune panels, Together with our previously announced test for brain injuries and neurodegenerative disease, these panels round out our portfolio and give us a leadership position in neuro biomarkers to support customers.

Meanwhile, LH carries a respectable BBB rated balance sheet. While its dividend yield is below 1% (due to a very low payout ratio of just 6%), it also returns capital to shareholders via buybacks. As shown below, LH has retired 10% of its outstanding float over the past 5 years alone.

Turning to valuation, while I see value in LH’s current price of $251 with a forward PE of 12.6, sitting below its normal PE of 13.6. This is considering the overall quality of the enterprise and the anticipated spin-off of its drug development business this year, which should unlock value and turn LH into a focused pure-play diagnostics company. Notably, analysts have a consensus Buy rating on the stock with an average price target of $280.

Investor Takeaway

Labcorp has made itself into a formidable diagnostics player with broad capabilities and has made technological investments to make its processes more efficient. Its recent acquisition of select laboratory assets from Ascension hospitals strengthens its positioning, and exemplifies its growth runway as it takes market share from hospitals. Lastly, I find value in LH at the current price considering the quality of the company, growth runway, and potential for strong long-term shareholder returns.