Thursday, August 02, 2007

Laboratory Corp (NYSE:LH): Jefferies calling for a bounce

- Jeffco is out with a call saying they think the sell-off in Laboratory Corp (NYSE:LH) is overdone. After LH reported inline Q2 results and reiterated its conservative FY07 EPS guidance of $4.11-$4.27 on July 24th, the company's stock has not only declined 7% but also broken through its 200-day moving average. Since July 17th, LH's stock price has fallen ~10%.

With net debt to total cap ratio of 11.4% and a leverage ratio of approximately 1:1, LH has a balance sheet that can easily be harnessed to drive shareholder value. Given the weakness in the stock, the firm anticipates that LH has been (or will be) an active purchaser of its shares under its current plan.

From a business standpoint, LH has done exceedingly well building its esoteric franchise and transitioning United Healthcare (UNH) lab volume over from Quest Diagnostics (DGX).

In this turbulent market, they believe that investors will soon shift toward high-quality, attractively valued defensive names. Given good LT growth prospects, significant trading liquidity and aprojected free cash flow yield of almost 8%, Jeffco believes that LH and DGX will be in demand.

LH is currently trading at 14.8x Jeffco's 2008 EPS estimate of $4.94. Applying a 17.5x multiple, which is inline with DGX's FY08 multiple, generates firm's target price of $86, which is over 17% higher than the current price.

Notablecalls: While LH stock already bounced 1.5 bucks yesterday, my gut tells me there may be some further buy interest in the name. Jeffco's comments regarding investors shifting to high-quality names make sense. The 8% FCF yield is just awesome. Stocks like LH usually trade around 10-15% from analyst tgts and it looks like Jeffco's tgt represents the mean. Not looking for a home-run here.

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