We're Boosting Our Price Target for This Two-Rated Holding
Margin prospects and share gains keep us bullish but here is where we would be buyers.
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We are boosting our price target on shares of Labcorp LH to $260 from $235. This reflects continued momentum in the company’s business and prospects for incremental margin improvement in 2025 at the larger Diagnostics segment that drives 75% of the company’s revenue and operating profits.
Despite the lift we are giving to our price target, the distance to it does not leave sufficient room to drive a rating upgrade from Two at this time. There is reason to think we could see LH shares settle out at lower levels compared to their post-earnings pop seen Thursday.
The driving factor in this is the 1.8 million short-interest shares heading into Labcorp’s earnings. Short-covering is in response to Labcorp’s modest September-quarter revenue and EPS beats and largely unchanged guidance for top-line growth of 6.6%-7.7% and EPS of $14.30 to $14.70. Granted, the guidance implies a quicker pace of top and bottom-line growth in the current quarter, but that wasn’t a new factor in management’s guidance. Recognizing that short interest and the better-than-expected earnings from competitor Quest Diagnostics DGX earlier this week explains some of the pre-earnings climb in LH shares over the last few days.
We continue to favor LH shares as the company continues to benefit from the growing number of hospital and regional lab deals it is inking and digests its acquisition of Invitae. While Invitae was a drag on diagnostic margins in the quarter, Labcorp continues to see it being accretive next year, which bodes well for incremental profit dollars falling to the bottom line. Management has the capacity and the company has the balance sheet for other nip-and-tuck acquisitions in this still-fragmented medical testing and diagnostics business.
Should we see LH shares drift back to the $215-$220 level as the wave of short-covering subsides, that would be an area at which we would consider adding additional shares.
At the time of publication, TheStreet Pro Portfolio was long LH.
