Friday, October 26, 2007

Jefferies: Time to Load the Boat with LabCorp (NYSE:LH)

- Jefferies is out with a call on LabCorp (NYSE:LH) saying yesterday's sell-off following Q3 results is overdone, in their opinion. Expectations and estimates are now reset, and the firm believes that the time to own LH, with its recurring revenue, strong free cash flows, and liquid balance sheet, is now. Reiterates Buy rating and $86 target.

From a revenue and margin standpoint, Q3 was a tough quarter—United Healthcare (UNH) volumes flatlined after Q2, Aetna (AET) volumes phased out, and the Cigna (CI) contract was repriced.

LH's balance sheet is extremely liquid (leverage ratio: 1.2x), and Jefco anticipates that the company would use capacity on that balance sheet to make acquisitions and buy back stock when and where appropriate. Keep in mind that LH has $329MM still remaining on its share repurchase plan that is not included in the company's guidance. If management were to fully utilize its authorization at current prices, annualized EPS could increase as much as $0.12.

LH is currently trading at a very low multiple of 13.9x their conservative FY09 EPS estimate of $5.01. Jefco believes 17x is a more appropriate multiple for LH. Thus, the $86 tgt, representing 24% upside from current price.

Notablecalls: I like this one. LH's no stranger to NC readers. Jefco was out with a marvelous bounce call back in August, yielding nice profits to those who took it. And now they're at it again.

The stock was down substantially after missing Q3 ests by a tad and giving cautious guidance for Q4. LH is the nation's 2nd largest laboratory corp and has been feeling the pain from managed care customers such as UNH, AET, CI, HUM etc.

Yet, several analysts covering the industry have expressed their belief that managed care re-pricing process is near completion, meaning recent guidance by LH management may be overly conservative. Cowen's Kemp Dolliver who rates LH Outperform is on record for saying he expects Humana (last national plan) to reach contract decisions in the next 1-2 weeks. That may serve as a positive catalyst for LH.

BAC's Robert Willoughby said yesterday that in a Pharmaceutical Services sector with more than one 3Q07 mine field (Owens & Minor, IMS HEALTH), this is the best quality asset off the high they would buy. He rates LH Buy with a $86 tgt.

The valuation looks moderate and with the potential for big buybacks, current guidance looks even more conservative.

I suspect the entry will be a bit tricky as I would generally like to see the stock down some more today and then stage an intraday recovery that would continue over the next couple of days. Yet, the call is strongly worded enough to cause the stock to open above yesteday's close, thus offering no low-risk entry.

Anway, one to watch.

By the way, I didn't make up the title of the call. It's Jeffco's brainchild.


Timothy Hussar said...

not regarding LH, but BW rather, what is the deal with this company, it has gotten KILLED over the last three earnings period, yet bounces back each time...

notablecalls said...


BW's an analyst darling.