On Monday, BofA Securities updated its outlook on Laboratory Corporation of America (NYSE: NYSE:LH), raising the price target to $260 from the previous $240, while reaffirming a Buy rating on the stock. The update comes amid discussions of margin dynamics within the company, particularly considering the upcoming acquisition of Invitae (OTC:NVTAQ).
The core laboratory diagnostics (LCD) segment of Laboratory Corporation is performing strongly, with increased volume growth driven by higher utilization and an uptick in tests per session. Additionally, a shift towards more complex esoteric testing and the implementation of Launchpad initiatives, which are expected to save $100-125 million in the 2024 fiscal year, are positively influencing the segment's margins.
The anticipated closure of the Invitae deal next week is projected to add approximately $120 million in sales to Laboratory Corporation. However, it is also expected to create a headwind to LCD margins of about 60 basis points, or roughly 40 basis points to the overall enterprise margins, leading to a year-over-year margin decrease for the segment in the 2024 fiscal year. This translates to an approximate 40 cent adjusted earnings per share (EPS) dilution in 2024, which is at the higher end of the guidance.
Despite this dilution, the analyst's outlook remains positive. The EPS impact in 2024 is believed to represent most of the dilution from the deal, with the assets expected to become net accretive to EPS in 2025. The analyst notes that there are opportunities for Laboratory Corporation to reduce selling, general and administrative expenses (SG&A) and to leverage the enterprise cost structure, which could further benefit the company's financial performance in the future.
In other recent news, Labcorp Holdings Inc. reported robust growth for the second quarter of 2024. The company highlighted a revenue of $3.2 billion and adjusted earnings per share (EPS) of $3.94. Labcorp's free cash flow from continuing operations reached $433 million. A key development during the quarter was the acquisition of select assets from Invitae, a leading medical genetics company, which is projected to bolster Labcorp's growth in 2025. Additionally, the company's Board of Directors approved a $1 billion increase in its share repurchase authorization.
Labcorp's diagnostics revenue grew by 8%, and biopharma laboratory services saw a 1% increase. The company also plans to refinance $2 billion of debt maturing over the next 12 months. Labcorp's updated 2024 full-year guidance predicts enterprise revenue growth of 6.4% to 7.5%.
However, the acquisition of Invitae's assets will be dilutive in 2024, and net interest expense is expected to rise from $210 million this year to about $240 million next year. These are among the recent developments for Labcorp.
InvestingPro Insights
As Laboratory Corporation of America (NYSE: LH) navigates its upcoming acquisition of Invitae, recent real-time data and InvestingPro Tips provide a nuanced view of the company's financial health and market position. The company's management has been actively buying back shares, signalling confidence in the company's future (InvestingPro Tip #0), and it boasts a high shareholder yield (InvestingPro Tip #1). These strategic moves could be instrumental in offsetting the anticipated earnings dilution from the Invitae deal.
InvestingPro Data highlights that Laboratory Corporation has a market capitalization of $19.82 billion and trades at a P/E ratio of 44.79, which adjusts to 24.76 on a last twelve months basis as of Q2 2024. The company has seen a revenue growth of 5.22% over the last twelve months leading to Q2 2024, reflecting its robust performance in the core laboratory diagnostics segment. Additionally, the stock has experienced significant returns over the last week (11.98%) and month (15.36%), trading near its 52-week high (InvestingPro Data).
For investors looking to delve deeper into Laboratory Corporation's performance and analysts' expectations, there are an additional 13 InvestingPro Tips available on the platform, which can provide further insights into the company's valuation, industry standing, and financial forecasts. These tips and metrics can be found at https://www.investing.com/pro/LH, offering a comprehensive analysis for those considering an investment in the healthcare diagnostics leader.
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