Labcorp Holdings, Inc. (LH) is a healthcare giant benefiting from the successful implementation of its strategic priorities. The company’s focus on targeted high-growth areas, such as cell and gene therapy, expansion into the consumer market, and international growth through its specialty testing and biopharma business, is driving its momentum. However, Labcorp faces headwinds from global economic uncertainties and foreign exchange issues. Despite these challenges, the company maintains a Zacks Rank #3 (Hold), reflecting its potential for continued growth.
Factors Driving LH Stock:
Labcorp’s strategic positioning in high-growth areas like cell and gene therapy, expansion into the consumer market, and international growth through its specialty testing and biopharma business are driving its success. The company has made significant strides in genomic profiling, with its Tissue Complete comprehensive genomic profiling (CGP) service now available in Geneva and Shanghai to support global clinical trials. Additionally, the integration of OmniSeq INSIGHT circulating tumor DNA has cemented Labcorp’s leadership in liquid biopsy comprehensive genomic profiling for solid tumors.
The Biopharma business continues to benefit from collaborations with leading pharmaceutical and biotechnology companies. Labcorp has embarked on collaborations to develop potential antivirals, treatments, and vaccines, further solidifying its position in the industry. The company’s Biopharma segment experienced impressive growth, driven by the strength of its central laboratories, its largest business unit, which saw a 9% increase in revenue during the second quarter of 2024. The Early Development business is also showing signs of recovery, with reduced cancellations and booking improvements, indicating higher revenues expected in the second half of the year.
Labcorp has implemented the LaunchPad initiative, a strategic cost-saving program aimed at improving margins. The company’s 2024-2026 guidance includes a savings target range of $100 million to $125 million annually. This initiative will be achieved through rationalizing facility and talent locations, leveraging technological advancements, integrating acquisitions, and re-engineering systems and processes. The impact of LaunchPad is already evident, contributing to the increase in operating income and margin during the second quarter, driven by strong demand. The stock price has also reflected this positive performance, rising 11.1% in the past three months, outperforming the industry’s 2.7% decline. With Labcorp strategically expanding into high-growth areas and focusing on cost-saving initiatives, the stock is expected to maintain its upward trajectory in the coming days.
Factors Weighing on LH Stock:
While Labcorp’s strategic focus presents significant opportunities, it also faces challenges. Its operations are heavily dependent on the demand for diagnostic testing and drug development services from patients, physicians, hospitals, medical device companies, and others. Volatility in global economic conditions, including inflation and the risk of recession, could negatively impact this demand, affecting customers’ ability to pay and consequently impacting Labcorp’s profitability. The escalating geopolitical situations in Ukraine and the Middle East pose additional risks, potentially leading to decreased testing volumes, supply chain disruptions, and service disruptions, ultimately increasing the cost of offerings.
During the second quarter, Labcorp experienced a 4.7% year-over-year increase in the cost of revenues, with SG&A expenses rising by 10.3%, primarily due to higher personnel costs. The company’s substantial international exposure makes it vulnerable to currency fluctuations. In 2023, Labcorp’s Biosciences segment generated nearly 58% of its revenue from overseas markets, while its Diagnostics segment also earned a portion in Canada and a smaller amount in other parts of the world. Approximately 13.7% of the company’s revenue was denominated in currencies other than the U.S. dollar in the first half of 2024. With the recent upward trend in the value of the U.S. dollar and further appreciation expected by analysts, Labcorp’s revenue could face challenges in international markets. The unfavorable foreign currency translation of 0.1% in the second quarter partially offset the revenue growth of the Biosciences and Diagnostics segments.
Key Picks
While Labcorp faces challenges, other companies in the broader medical space offer attractive investment opportunities. Some better-ranked stocks include Intuitive Surgical (ISRG), TransMedics Group (TMDX), and Quest Diagnostics (DGX). Intuitive Surgical and TransMedics currently hold a Zacks Rank #1 (Strong Buy), while Quest Diagnostics carries a Zacks Rank #2 (Buy).
Intuitive Surgical’s shares have soared 60.5% in the past year, with earnings estimates moving 5.1% higher to $1.65 per share for 2024 over the past 30 days. The company has consistently exceeded earnings estimates in the trailing four quarters, delivering an average surprise of 8.97%. In the most recent quarter, it posted an impressive earnings surprise of 16.34%.
TransMedics’ shares have witnessed a remarkable 135.2% surge in the past year, outperforming the industry’s 14.9% growth. Earnings estimates for 2024 EPS have increased significantly, rising 125% to 27 cents in the past 30 days. TransMedics has consistently exceeded earnings expectations in the trailing four quarters, delivering an average surprise of 287.50% and a recent quarter surprise of 66.67%.
Quest Diagnostics has also shown strong performance, with its shares rising 55.5% in the past year compared to the industry’s 17.9% growth. Earnings estimates for 2024 EPS have increased by 1.7% to $2.40 in the past 30 days. Quest Diagnostics has consistently exceeded earnings estimates in the trailing four quarters, delivering an average surprise of 7.18% and a recent quarter surprise of 6.90%.
These companies, with their strong track records, promising future prospects, and positive market performance, offer compelling investment opportunities in the healthcare sector.
