LabCorp Reports Strong Third Quarter; Quest Less So

The two major national laboratories continue to wring higher profits out of their operations, even as organic revenue growth remained modest.

Both LabCorp and Quest Diagnostics fattened their bottom lines during the quarter ending Sept. 30. The Burlington, N.C.-based Lab- Corp reported net income of $153.1 million on revenue of $2.27 billion, while the Madison, N.J.-based Quest reported net income of $354 million on revenue of $1.88 billion.

LabCorp's acquisition of pharma giant Covance contributed $647 million in revenue for the quarter. Factoring that out, its revenues of $1.62 billion were up about 4.8 percent from the third quarter of 2014, when its pre-Covance revenue was $1.55 billion. Covance's revenue grew by 2.6 percent year-over-year.

"After a bit of a choppy start to the year, LabCorp delivered a very strong 3Q, particularly against the backdrop of what has become an increasingly choppy healthcare services operating environment," said Evercore CSI Analyst Michael Cherny in a report.

In a call with analysts, LabCorp Chief Financial Officer Glenn Eisenberg forecast total revenue growth for 2015 of 41 percent. That included 4.5 to 5.5 percent growth during this calendar year for the non-Covance operations, up from prior guidance of 3.5 to 5.5 percent "primarily due to continued strong organic growth." The diagnostics division experienced overall growth of 2.9 percent for the quarter and 2.3 percent in terms of organic growth.

Earnings per share guidance for the year was narrowed from $7.80 to $7.95, compared to prior guidance of $7.75 to $8.

For the first nine months of 2015, LabCorp reported net income of $323.5 million on revenue of $6.38 billion. That compares to net income of $392.7 million on revenue of $4.5 billion for the first nine months of last year.

"We delivered significant and measurable progress on the strategic priorities underlying the acquisition of Covance, positioning the Company well for long-term future profitable growth," said LabCorp Chief Executive Officer Dave King.

Quest was a slightly different story: Its revenue was down slightly from the $1.9 billion reported for the third quarter of 2014, and missed analyst consensus of $1.89 billion. The company said, on an equivalent basis, revenue actually grew by 0.9 percent, factoring in its clinical trials joint venture with Quintiles. But on a generally accepted accounting basis, revenue dropped 1.3 percent. Quest's net income for the third quarter of this year was more than double the $139 million reported for the third quarter of 2014.

That growth in net income is expected to provide some headwinds for the fourth quarter in terms of higher provisions for income taxes, said Quest CFO Mark J. Guinan.

Regarding guidance for all of 2015, Guinan said revenue would be just under $7.5 billion, with earnings per share of $4.75 to $4.80, flat to slightly lower than before.

Quest CEO Steve Rusckowski projected the company would see earnings growth of 8 percent to 10 percent over the next three years.

Amanda Murphy, an analyst with William Blair & Co., wrote in a report that "Quest's underlying business has improved relative to historical trends although organic growth in the underlying lab business has remained relatively flat. The company's cost-cutting initiative as well as easing reimbursement pressures has continued to drive leverage." As a result, she projects a relatively modest growth in its stock price for the coming months.

Takeaway: Quest Diagnostics and LabCorp continue to find ways to improve their bottom lines, even as there is little room to grow outside of acquisitions.