Laboratory Corp. of America Holdings
Wednesday’s close: $88 (U.S.), up 62 cents, or 0.7 per cent
52-week trading range: $81.56 - $95.30 a share
Annual dividend: none
Analysts’ ratings: There were 5 buys, 17 holds and 3 sells, according to Bloomberg data. Target prices ranged from $83 from Isaac Ro at Goldman Sachs, to $106 a share from Anthony Vendett at Maxim Group LLC.
Recent history: Shares of the second-largest U.S. provider of laboratory clinical testing centres are off nearly 4 per cent over the past year. The stock of Laboratory Corp. of American Holdings, which has about a 10 per cent share of of the U.S. market, has struggled as visits by Americans to doctors have slowed amid a sluggish economy. It acquired Medtox Scientific Inc. last year in a $241-million deal to expand its specialized testing services, but reduced its profit forecast for 2012 because of the costs from acquisitions. There was speculation last August that LabCorp may be the target of a private equity takeout, but it denied being in talks. The stock also suffered from a trade where investors, who want exposure to the sector, sold shares of LabCorp. to buy cheaper shares of industry leader Quest Diagnostics Inc., which also pays a dividend.
Manager Insight: Prospects for LabCorp should improve as the U.S. economy recovers and visits to physicians increase when Americans feel more secure about their jobs. The company, which has a free cash-flow yield of 9 per cent, is under pressure by investors to pay a dividend, said Michael Simpson, a portfolio manager with Sentry Investments, which has owned the stock for about three months in its income funds. “We think management may implement a dividend over the next 12 months...Eighty per cent of the S&P 500 pays a dividend so it is in the minority.”
The U.S. Patient Protection and Affordable Care Act, commonly called Obamacare, will extend health-care coverage to much wider population, so that is another catalyst, Mr. Simpson said. Laboratories are also being paid less money per test from government plans, so that provides LabCorp an opportunity to consolidate the smaller, less efficient players, he added. “There are over 5,000 independent labs in the U.S. market that make up 19 per cent of the overall market.”
Within the next 18 months, “I think the stock could go up to $96 a share,” he said. LabCorp’s 23-per-cent return on equity is also very compelling, he noted. “The risk is a general slowdown in the economy, and unemployment going up so there are lower visits to doctors...There is also risk in doctors referring patients to labs in hospitals [with 50 per cent of the market share]. But some of the hospital labs are not efficient, and cannot do all the tests.”