Lab-testing firm LabCorp (NYSE:LH) is firing on all cylinders right now. The good times are expected to continue into the foreseeable future, but at current stock price levels an archrival may be an even more tempting opportunity right now.
Earlier today, LabCorp posted impressive fourth-quarter and year-end 2006 results. Our recent Fool by Numbers will walk you through the quarterly details; in a nutshell, sales and earnings growth comfortably beat analyst expectations, even when including a number of special charges. Annual results were equally inspiring as sales grew 7.9% and diluted earnings improved 19.6%.
Management sees 2007 as another solid year of top and bottom-line expansion. It is currently projecting 11%-13% sales growth and operating cash flow of $690 million-$710 million, or roughly 11% higher year over year.
Investors have become accustomed to stellar results at LabCorp; sales growth has averaged 11.6% annually over the past five years and operating cash flow has advanced 18.4% over this time frame. Better yet, the company announced a major coup as healthcare managed-care provider behemoth UnitedHealth Group (NYSE:UNH) decided to switch its lab service needs to LabCorp from peer Quest Diagnostics (NYSE:DGX).
During the earnings conference call, LabCorp management stated that UnitedHealth business began moving LabCorp as the fourth quarter wound down. It also talked favorably about other managed care sales from Aetna (NYSE:AET), Cigna (NYSE:CI), and Humana (NYSE:HUM). In other words, LabCorp is kicking you-know-what on the competitive front, and is very confident about its future as it gains new business and increases sales of genomic and esoteric lab tests that carry higher profit margins.
With the recent run in LabCorp shares, I believe most of this good news is already reflected into the stock price. In contrast, Quest Diagnostics has been weaker, due primarily to the loss of the UnitedHealth contract. As it stands currently, LabCorp is trading at 24 times trailing earnings while Quest is trading closer to 18 times. And it's uncertain how many concessions LabCorp had to make to win UnitedHealth; Quest stated it could not justify the terms of any contract renewal negotiations with UnitedHealth while LabCorp stated it may have to pay transition payments for the business and is still working through how profitable the relationship will be.
I still find the long-term attractiveness of the lab testing industry to be favorable as the industry consolidates and demographics support increasing healthcare services as baby boomers age. I find Quest the safer bet at current levels, as the two companies are similar on a number of levels such as profitability, historical growth, and prospects going forward. Right now, the difference is that Quest has some near-term uncertainty as it recovers from the UnitedHealth loss, while LabCorp is basking in the win and also seeing higher growth than it would normally. I would expect the gap to narrow to more historic levels going forward.
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UnitedHealth and LabCorp are Motley Fool Stock Advisor recommendations. UnitedHealth is also a Motley Fool Inside Value selection. Whatever your investing style, the Motley Fool has a service for you.
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to track him via the latest RFID technology or simply email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
