Will Covance Drug Development Drive LabCorp (LH) Q4 Earnings?

Laboratory Corporation of America Holdings (NYSE:LH) , also known as LabCorp, is slated to report fourth-quarter 2017 results, before market opens on Feb 6. Last quarter, the company delivered a positive earnings surprise of 2.9%. It has an average earnings beat of 2.3% for the trailing four quarters. Let's see how things are shaping up for this announcement.

Factors at Play

Similar to last quarter, LabCorp is expected to gain on strength in the LabCorp Diagnostics segment in the fourth quarter Notably, in the third quarter, revenues at this segment grew primarily banking on favorable price, mix, tuck-in acquisitions and organic volume.

After several quarters of a weak show, Covance Drug Development has started to report revenue growth from the third quarter, on the back of the Chiltern acquisition, strong organic growth and favorable foreign currency translation. Chiltern has added highly complementary capabilities to LabCorp’s offerings, including scale expansion in Asia Pacific, broader reach in the fast-growing emerging and mid-tier biopharma customer segment and expertise in oncology drug development. All these factors should continue to benefit LabCorp’s Covance Drug Development topline in the yet-to-be reported quarter as well.

Laboratory Corporation of America Holdings Price and EPS Surprise

Laboratory Corporation of America Holdings Price and EPS Surprise | Laboratory Corporation of America Holdings Quote

We are also looking forward to the company’s latest deal with Agilent to make the latter’s cancer diagnostic test available for expanded use. This development should start to contribute to LabCorp’s top line from the fourth quarter itself. Also the company’s comprehensive laboratory partnership with Capital Health is a positive.

As per LabCorp’s earlier-provided guidance for 2017, net revenue is now expected in the band of 8-8.5% year over year. This includes a 10-bps impact from unfavorable foreign exchange. The Zacks Consensus Estimate for revenues is pegged at $10.19 billion. Adjusted EPS is expected to remain in the range of $9.40-$9.60. The Zacks Consensus Estimate of $9.53 is within the guided range.

However, over the last two years, LabCorp has faced several reimbursement issues that have hurt revenues. The company is concerned about the CMS (Centers for Medicare & Medicaid Services) proposal related to Protecting Access to Medicare Act (PAMA). We believe reimbursement pressure will affect the company’s performance in the soon-to-be-reported quarter as well.

LabCorp has been constantly trying to check the rise in operating expenses, which affected operating margin in the last reported quarter. Chances of a turnaround in the scenario any time soon are slim.

Here is what our quantitative model predicts:

LabCorp does not have the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: The Earnings ESP for LabCorp is -0.07%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: LabCorp carries a Zacks Rank #3, which increases the predictive power of ESP. However, the negative ESP makes surprise prediction difficult.

Stocks to Consider

Here are a few medical stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

Bio-Rad Laboratories (NYSE:BIO) has an Earnings ESP of +4.45% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Myriad Genetics (NASDAQ:MYGN) has an Earnings ESP of +0.42% and a Zacks Rank #3.

Henry Schein (NASDAQ:HSIC) has an Earnings ESP of +0.09% and a Zacks Rank #3.

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