Adding to a Position on Weakness
After digesting Labcorp’s quarterly results and earnings conference call, we are buying more of this recently initiated portfolio holding.
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* We are using the post-earnings pullback in Labcorp to add to this small position.
* Our LH price target remains $235.
| Symbol | Transaction Type | #Shares Traded | Recent Price ($) | Shares Owned After Trade | % Portfolio |
|---|---|---|---|---|---|
LH | Buy | 95 | 199 | 260 | 1.25 |
After you receive this Alert, we will buy 95 Labcorp LH shares at or near $199. This will grow the portfolio’s position to 260 shares, or roughly 1.25% of the portfolio.
After digesting Labcorp’s March-quarter results and earnings conference call, we are adding to this recently initiated portfolio position. Following this buy, the size of our LH position will still be on the small side, and we aim to build it further in the coming days and weeks. Should we see the market continue to pull back, that could bring the opportunity to do so.
Despite delivering results that topped market expectations and management boosting the midpoint of its 2024 EPS guidance to $14.45-$15.35 from $14.30-$15.40, LH shares are trading off today. In examining that new EPS range, the lower end was lifted nicely but the upper end was dialed back modestly. In our view, that is one of the factors weighing on LH today but the smarter way to examine that guidance is the 2024 EPS midpoint was lifted to $14.90 from $14.85. Perhaps Labcorp could have been as clear with that message to the market as it was with its consensus-topping results. Revenue for the March quarter came in at $3.18 billion but at $3.68, EPS was the star of the quarter compared to the $3.48 consensus and $3.46 in the year-ago period.
When we added LH to the portfolio, we discussed their multiple year-to-date acquisitions and those led the company to boost its revenue outlook for the Diagnostics business. No real surprise there and the existing base business continues to perform well, driven in part by hospital-related share gains and favorable pricing compared to last year.
Even after the acquisitions completed in the March quarter, during the earnings call management said the company still has a lot of financial flexibility to do share repurchases and room for more strategic, tuck-in acquisitions. This suggests we could see some additional acquisitions in the coming quarters, and we like that layer of acquired growth building on organic growth drivers.
Management did make one interesting comment about potential acquisitions but also its base business — it aims to improve its mix to larger-to-medium customers because of its use of master service agreements (MSAs). This suggests there could be some lumpiness to new program wins because of the expiration timing with MSAs. In the meantime, management will be integrating its string of recent acquisitions, laying the groundwork for further margin improvement in the coming quarters. Our thinking is we are likely to see some of that flow through in H2 2024.
Alongside these results, Labcorp announced it intends to implement a new holding company structure on May 17. The name of the new holding company will be Labcorp Holdings Inc., which will replace Laboratory Corporation of America Holdings as the publicly traded entity, and Laboratory Corporation of America Holdings will become a wholly owned subsidiary of Labcorp Holdings Inc. The shares will continue to trade under the existing symbol LH and Laboratory Corporation of America stockholders will automatically become stockholders of Labcorp Holdings Inc. on a one-for-one basis with all of the same rights. We see this as more form over substance, and it has no impact on our rationale for owning LH shares.
At the time of publication, TheStreet Pro Portfolio is long LH.
