Gathering New Information about Stocks, Health, and Sports

Introduction

Laboratory Corp. of America Holdings (LH) is an $8.42 billion company in the healthcare facilities industry. Market capitalization competitors in this industry include Quest Diagnostics, DaVita, and VCA Antech. The healthcare facilities industry is down 14.51% over the past year compared to the S&P 500 which is down 6.11% during the same period. Over the past month, the industry has been down 7.96%, while the S&P 500 has been down 9.65%. After a strong sell-off earlier this month, there is a strong potential for healthcare facility companies to grow. Evidence comes from a potentially recession-adverse industry and the long-term implications of required healthcare services in the future. Laboratory's growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Laboratory produces. According to Reuters, Laboratory “is an independent clinical laboratory company in the United States.” Most of the company’s business comes from its testing. Using the company’s national network, Laboratory is able to test patients for certain diseases including oncology, HIV genotyping, and diagnostic genetics, among others. Testing also involves routine testing and patient diagnostics. While only a domestic operation, Laboratory is expanding quickly. It acquired a kidney stone specialist, Litholink Corporation, in 2006. The management team has also reported the development of new testing methods for productive and efficient procedures. More specific information about testing can be found in Laboratory’s two segments: routine and specialty testing.

Routine testing is used to evaluate a patient’s previous diagnosis, health treatment, and undiagnosed conditions. With a fast turnaround, the company uses test found from urine, blood, and thyroids. This form of testing differs from Laboratory’s second business segment: specialty testing. The company tries to focus on markets that “are not typically served by the clinical testing laboratory.” Here the testing for HIV, cancer, and other similar diseases are tested. Most of the testing is though viral and biochemical techniques. Turnover, however, is much longer than routine testing. As the population age continues to age and as more diseases arise, there may be huge potential for testing facilities. As a result, Laboratory may potential seek great benefits from this evolving demand.

Growth

Laboratory has a strong growth history. In the past fiscal year, the company reported, according to Reuters, a revenue figure near $3.59 billion. This number is 12.71% higher than what the company produced last fiscal year. While the number is below the industry’s 20.40% sales growth rate, there are explanations against this potential concern. Laboratory is the third highest mid-cap in its respective industry. Typically, a high market-cap equals high revenue. When revenue is high, continuous upwards growth is hard to produce year-over-year, especially compared to competitors. However, comparing Laboratory’s sales figures with market-cap competitors, investors realize Laboratory’s relative strength. Quest Diagnostics only increased sales by 5.48% last year, and DaVita only increased revenues by 9.29%. In addition, a more interesting metric to look at when comparing growth is earnings acceleration. Laboratory reported earnings growing 21.97% last year. The industry’s average only saw an 11.15% increase. Quest Diagnostics decreased its year-over-year earnings by 9.07%, and VCA Antech only saw a small increase in earnings of 10.96%. These relatively strong numbers, coupled with stand-alone strong five year average growth rates, illustrate Laboratory’s great potential to please investors regarding quarterly statements and share price.

In addition to producing strong revenue figures, Laboratory is able to control its costs. The past fiscal year, Laboratory reported gross, operating, and net income margins of 42.03%, 19.12%, and 11.77%, respectively. Compared to Laboratory’s five year average rates, these are relatively flat. And this characteristic is generally true for the industry average. However, there is a deeper connotation to these numbers. As precedence plays such an important role for future corporate earnings, a strong past may signal a strong future. According to Reuters, the medical facilities industry shows five year gross, operating, and net income margins of 46.05%, 13.06%, and 6.84%. By comparison, Laboratory makes more money per every dollar of revenue. As a result, EPS reports and expectations go up which translates to a higher share prices. This trend has been apparent for nearly five years and has a strong possibility of extending. While there may be other companies who follow similar patterns, Laboratory’s rivals have relatively lower margins. Quest (40.67%, 16.32%, and 8.50%, respectively), DaVita (31.77%, 16.51%, and 7.14%, respectively), and VCA Antech (28.15%, 20.29%, and 17.49%) all fall short to Laboratory’s numbers. Therefore, Laboratory not only illustrates strong revenue growth, but excellent managerial cost controls as well.

Combining both growth aspects, an investor comes to find ROE. Laboratory’s ROE is quite strong at 22.54%. This number is higher than the industry’s 18.10% average and also higher than the company’s five year average of 19.68% (which is subsequently higher than the industry’s five year average at 19.79%). Moreover, Laboratory’s ROE is higher than industry competitor Quest’s number of 17.23%. Laboratory also supports a strong, above average, ROA of 11.12% and ROI of 14.46%. Therefore, there is plenty of evidence that Laboratory is an excellent company when it comes to growth.

Valuation

With such a high ROE and growth figures, investors may figure that the company’s valuation may be overvalued. However, this assumption is not the case. According to Reuters, the industry P/E average is 20.67 and the respective price to sales average is 1.61. Laboratory sees a forward P/E ratio of 17.70 and a forward price to sales ratio of 2.19—mostly undervalued numbers compared to the industry. In addition, Laboratory’s numbers are also below industry competitors. VCA Antech’s respective figures are 27.43 and 2.85. Competitors Quest and DaVita both have similar numbers to Laboratory—but with lower growth expectations and precedence. More specific to growth, Laboratory’s PEG ratio of 1.24 is relatively low compared to these industry rivals as well. Quest (1.25) and VCA Antech (1.66) both have higher ratios compared to Laboratory. Therefore, using the aforementioned information, Laboratory is undervalued compared to the expected growth it will see in the future, making this stock an attractive buy for investors.

Efficiency

Laboratory is efficient. The company's receivable turnover of 6.44 is respectable compared to industry competitors (Quest: 7.13). Laboratory manages to collect cash from consumers every 51 days. Inventory turnover at 45.32 also follows a better pattern compared to the industry’s 31.79 number. Moreover, asset turnover is also strong at 0.91. In terms of liquidation, Laboratory’s current ratio is 1.20—a solid number related to debt and equity purchases. This statistic coincides with the company’s low debt to equity ratio of 1.13. Some investors may question high debt financing, but the growth rates are excellent. And most of that growth comes from using riskier lines of capital. Moreover, institutions own 95.00% of all Laboratory shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

Laboratory performed flat in 2007. The company’s share price has increased 1.49% year-to-year. This type of growth is solid for a recessionary-type economy. There seems to be some support at the 70 dollar share price range dating back to early-2007. The last time Laboratory reached this amount the company rebounded and appreciated 20%. There is a possibility a similar situation could occur in the future.

More specific to the current month, Laboratory illustrates strong technical signals. The 50 day SMA and 50 day EMA have converged after the $73 mark, signaling a support level. The convergence will possibly lead to a strong outbreak in the coming months and weeks. The company is a little undervalued compared to the RSI index at 70.86, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Laboratory according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Laboratory is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
January 25th, 2008