On Friday, Evercore ISI initiated coverage on Laboratory Corporation of America (NYSE:LH), a leading provider of clinical laboratory services and drug development support. The firm set an "In Line" rating with a price target of $240.00 on the company's stock.
Laboratory Corporation of America, recognized as the second-largest independent laboratory testing service provider in the U.S., is expected to see its Diagnostics (Dx) revenue grow at a sustainable mid-single-digit rate. This includes a projected 1.5-2.5% growth from mergers and acquisitions, leveraging the numerous opportunities in the fragmented hospital outreach segment.
Despite near-term pressures from softer pharmaceutical funding and non-human primate (NHP) pricing, Evercore ISI anticipates that LabCorp's Biopharma Lab Services (BLS) division can achieve the lower end of the company's long-term growth target of 4.5-7.5%. The firm's analysis suggests that LabCorp's operating margins (OMs) will face challenges, forecasting only a modest expansion of approximately 10-40 basis points by 2026. This is due to factors such as persistent wage inflation, NHP pricing adjustments, COVID-19 related headwinds, and potential impacts from regulatory changes like PAMA and SALSA.
Evercore ISI expressed a neutral stance on LabCorp's stock, attributing their position to uncertainties surrounding the company's margin trajectory and its current valuation. The valuation, approximately 15 times the estimated 2024 P/E, aligns with major health service competitors but exceeds LabCorp's historical five-year average P/E of around 11 times. The firm indicated that improved clarity on margin expansion and a more attractive valuation could lead to a more positive outlook on the stock.
InvestingPro Insights
Laboratory Corporation of America (NYSE:LH), a prominent player in the Healthcare Providers & Services industry, is currently trading at a P/E ratio of 29.62, with an adjusted P/E ratio over the last twelve months as of Q3 2023 standing at 15.73. This valuation reflects the market's anticipation of future earnings growth, despite analysts predicting a sales decline in the current year. The company's revenue growth has been positive, with a 16.02% increase over the last twelve months as of Q3 2023, and a quarterly revenue growth of 6.63% in Q3 2023.
InvestingPro Tips suggest that management has been actively engaged in share buybacks, indicating a potential confidence in the company's value. Additionally, the company has a high shareholder yield, which could be an attractive point for investors seeking returns in the form of dividends and share repurchases. On the flip side, it's worth noting that three analysts have revised their earnings downwards for the upcoming period, which may signal a need for investors to keep a close watch on future earnings reports.
The company's stock has generally traded with low price volatility, which might appeal to investors looking for stability in their portfolio. With the company being profitable over the last twelve months and analysts predicting profitability for this year, Laboratory Corporation of America presents itself as a potentially robust investment in the healthcare sector. For readers interested in gaining more in-depth analysis and additional InvestingPro Tips, they can explore the 7 tips available for LH at https://www.investing.com/pro/LH. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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