LabCorp, Quest Diagnostics Both Report Better-Than-Expected Quarterly Earnings

It wasn’t that long ago when LabCorp and Quest Diagnostics were struggling tomake their numbers. Now they’re actually beating the expectations of Wall Street.

Both of the nation’s largest laboratories reported better than expected earnings for the first quarter ending March 31, mostly demonstrating that a turnaround for thelong-troubled laboratory sector has made a full-fledged arrival.

The North Carolina-based LabCorp reported net income of $160.2 million on revenue of $2.3 billion. That compares to the first quarter of 2015 net income of $3.1 million on revenue of $1.8 billion. Given the nearly $140 million in restructuring charges LabCorp booked during the first quarter of 2015, operating income paints a more impressive picture: It was $301.9 million during the first quarter of 2016, compared to $132.4 million during the first quarter of last year. There was also $153.5 million in writeoffs during the first quarter of 2015 attributable to the acquisition of drug testinggiant Covance.

Indeed, a considerable part of the year-over-year revenue growth is attributable to the Covance deal, which closed in mid-February of 2015. It contributed $703 million during the quarter, compared to $267.5 million during the first quarter of2015, which excluded all revenue up to Feb. 18 of last year.

Nevertheless, revenue from Covance grew 12.3 percent compared to the first quarter of last year. LabCorp’s diagnostics division contributed the other $1.6 billion,up 7 percent from a year ago.

The revenue growth was higher than the consensus of Wall Street analysts by $100 million, a 4.5 percent “beat” that is in the upper stratosphere for such outperformances. The Covance revenue contribution beat Wall Street consensus by nearly7 percent.

Earnings per share, at $2.02, also beat the consensus of $1.95.

“We are off to a terrific start to the year, highlighted by robust organic revenue growth and double-digit adjusted (earnings) growth in the quarter,” said Dave King, LabCorp’s chief executive officer, in a statement. “Broad-based demand for the services of LabCorp Diagnostics and Covance Drug Development is evidence of ourcustomers’ enthusiasm for our differentiated offering.”

The robust numbers moved LabCorp to raise its guidance for the 2016 calendar year. Revenue guidance was changed to a forecast increase of 7.5 percent to 9.5 percent to an increase of 8.5 percent to 10.5 percent. The LabCorp diagnostics division is expected to experience revenue growth of 4 percent to 5.5 percent, up from 3.5 percent to 5.5 percent. The Covance division is expected to grow 6 percent to 9 percent, up from the prior guidance of 2 percentto 5 percent.

Earnings per share estimates were also raised from a range of $8.55 to $8.95, versus the prior $8.45 to $8.85. Earnings per share in 2015 was $7.91.

“While some may argue that there were some temporal benefits on the lab side that elevated results in the quarter, ultimately we believe this result was more evident of performance we are likely to see throughout the year ... and should likely argue for continued multiple expansion/firming,” Evercore ISI analyst Ross Muken saidin a report.

LabCorp is continuing to grow its operations through mergers and acquisitions and other new business growth. In a phone call with analysts, King said LabCorp had invested more than $100 million in so-called “tuck-in” deals—transactions small enough that they did not necessarily require a public announcement. It also has accumulated some $190 million in orders for the use of deidentified patient data, according to King. He also believes that revenue in the area of companiondiagnostics will top $100 million by 2018.

The company did have one dark spot: Bad debt increased modestly, mostly as the result of what Chief Financial Officer Glenn Eisenberg said was “increased patientresponsibility”— a reference to increased cost shifting by insurers.

Meanwhile, the New Jersey-based Quest Diagnostics also posted strong numbers, which, although not quite as earth-shattering as LabCorp’s, suggest that it hasgreater headwinds than its now larger competitor in terms of growth.

The New Jersey-based Quest reported first quarter net income of $102 million on revenue of $1.86 billion. That compares to net income of $61 million on revenueof $1.84 billion.

Although overall revenue grew only 1.3 percent year-over-year (3.6 percent on an equivalent basis), revenue for the diagnostics information division grew by 3.8 percent. Overall test volumes grew by 2.6 percent, boosted in part by someacquisitions.

“We’re off to a good start in 2016 with a solid performance in the first quarter,” said Quest CEO Steve Rusckowski. “Our strategy to refocus on our Diagnostic Information Services business in line with our five-point strategy is largely complete. We are encouraged by the progress we’re making and are on track to meet our commitmentsfor the remainder of the year.”

Like LabCorp, Quest also reported an increase in bad debt expense to 4.6 percent of revenue from 4.3 percent during the firstquarter of 2015.

“Bad debt expense is typically highest in the first quarter due to increased patient responsibility associated with high deductible plans,” Quest Chief Financial Officer Mark Guinan said in a call with analysts. “The drivers of the increase were a continued shift to greater patient responsibility, and a change in our business mixas our clinical trials and products businesses had lower bad debt rates.”

Quest did not make revisions to its guidance. Revenue is forecast to increase between1.5 percent and 2.5 percent for calendar 2016.

Nevertheless, the numbers posted by Quest for the quarter beat estimates of $1.84 billion for revenue, although earnings were in line with the consensus of WallStreet analysts.

“With respect to the guidance reiteration we find that unsurprising given the result and look for color on volume/pricing/mix expectations for the remainder of (thecalendar year),” Muken said in a report.

The share prices of both companies diverged slightly.

Quest’s stock price has stayed around $75 per share in trading on the New York Stock Exchange. LabCorp’s moved up slightly, from around $125 a share to $126 a share. However, the share prices of both companies have been essentially flat over the past year, suggesting that there have not been too many surprises in thepaths they are currently charting.

Takeaway: LabCorp and Quest Diagnostics, both of which were struggling to grow just a couple of years ago, have broken out of that slump in adramatic fashion.