Raising Our Price Target for This Holding After Post-Earnings Pop

Labcorp LH continues to execute on its strategy to integrate acquired businesses, expand its footprint, and reap the benefit of cost synergies, while also growing its diagnostics capabilities. As such, we are lifting our LH price target to reflect prospects for stronger-than-expected margin improvement in the near term and the growth in backlog levels that support stronger revenues ahead.

We are raising our price target for LH to $300 from $265. Given the upside to our new target following Thursday's post-earnings pop in the shares, we are sticking with our Two rating, but a pullback near $255 would not only offer an attractive pickup point but also lead us to revisit that rating.

Breaking Down Labcorp’s Results

Quarterly results earlier this week from Quest Diagnostics DGX laid the groundwork for those from Labcorp, and they did not disappoint. Labcorp delivered a sizable bottom-line beat, reporting June-quarter EPS of $4.35 compared to the $4.17 market forecast and $3.94 in the year-ago quarter.

That more than 10% year-over-year increase in EPS was a tad faster than the top-line growth of 9.5% posted in the quarter, which led to $3.53 billion in booked revenue compared to the $3.49 billion consensus forecast. The faster rate of bottom-line growth is tied back to some nice margin expansion at both its Diagnostics and Biopharma Lab Services businesses. For us, the driver of Labcorp's performance remains the Diagnostics business as it accounts for 78% of consolidated revenue and 80% of operating profits.

Exiting the June quarter, Labcorp’s trailing 12-month orders accelerated to $3.34 billion, up from $3.15 billion three months earlier, leaving its total backlog at $8.71 billion compared to $8.18 billion. That, along with some additional nip-and-tuck acquisitions completed in July, including acquiring select assets of the outreach business from Community Health Systems across 13 states, backs management's raised outlook for 2025. Management now sees its top line rising 7.5%-8.6% year over year, compared to 6.7%-8.0% at the end of March.

In the coming quarters, much like we see at Waste Management WM, the continued integration of acquired businesses should drive incremental margin expansion at Labcorp. That in turn should bolster free cash flow, which can be used to further consolidate the fragmented diagnostic and testing industry as well as fund investments to expand Labcorp’s testing menu and pay dividends to shareholders. With that in mind, the company’s next quarterly dividend of $0.72 will be paid on September 11 to stockholders of record as of the close of business on August 28.

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At the time of publication, TheStreet Pro Portfolio was long LH and WM.