Laboratory Corporation of America Holdings (LH)

Transcription

The Henry Fund
Henry B. Tippie School of Management
Royce Walton [[email protected]]
October 21, 2015
BUY
Stock Rating
Healthcare – Diagnostic Testing
Investment Thesis
We recommend a BUY for Laboratory Corporation of America Holdings (LH).
Recent market turmoil and cuts to federal reimbursements beat down the
stock, but LH made a timely upgrade to their moat by acquiring Covance in
2015. The new company can increase their market share and generate
powerful revenue synergies during this difficult time. Additional investments
in new tests and automated processes will also drive deeper customer
relationships. These moves are undervalued in the market, and LH has the
potential for significant outperformance.
Drivers of Thesis
 Synergies from Covance acquisition: Analysts were initially skeptical of
the Covance acquisition, but we expect both companies to benefit from
revenue and operational synergies.
 Project LaunchPad and Testing Automation: LH leads the industry in
automated testing processes. Their business efficiency platform, Project
LaunchPad, also gives LH the tools they need to combat industry-wide
margin compression.
 Increased funding for drug development: Funding for early stage drug
development is at all-time highs and late stage funding is nearing the end
of its cycle. We believe that Covance increases LH’s exposure to both
cycles, eliminating the risk of any indivdual cycle.
Risks to Thesis
 Integration risks: Covance cost over $6 billion, and LH took on
considerable debt to complete the acquisition. LH also entered an
unfamiliar industry, but we believe the company’s previous
acquisition/integration efforts will help them bridge the gap quickly.
 Currency exchange: While Covance’s international exposure decreases
LH’s tax base, it also introduces currency exchange risks. We believe that
a strong dollar will continue to restrict Covance’s growth through 2017.
 Pricing pressure: Medicare reimbursement pressure drive industry-wide
margin compression, but Covance decreases LH’s revenue exposure to
public payers, which was already below their largest competitor.
Target Price
Henry Fund DCF
Henry Fund DDM
Relative Multiple
Price Data
Current Price
52wk Range
Consensus 1yr Target
Key Statistics
Market Cap (B)
Shares Outstanding (M)
Beta
Dividend Yield
Est. 5yr Growth
Price/Earnings (TTM)
Price/Earnings (FY1)
Price/Sales (TTM)
Price/Book (mrq)
Profitability
Operating Margin
Return on Assets (TTM)
Return on Equity (TTM)
Data Source: FactSet
LH
$124-137
$131.03
$130.28
$138.64
$112.60
$95.61 – 131.19
$141.41
$11.38
101.10
0.86
N/A
4.7%
19.1
17.4
1.6
2.4
15.1%
6.41%
11.5%
DGX
20
19
15
15
10
15
12
11
15
13
9
Earnings Estimates
2012
$6.09
17.2%
EPS
growth
2013
$6.36
4.4%
2014
$6.03
-5.2%
5
2015E
$7.05
17.0%
2016E
$7.53
6.8%
2017E
$7.74
-3.0%
0
Mkt Cap
P/E
ROE
Op Margin
12 Month Performance
LH
30%
Company Description
S&P 500
20%
10%
0%
-10%
S
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N
D
J
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M
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J
J
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is a leader in outsourced diagnostic testing. They
also added drug development services to their
portfolio with their recent acquisition of
Covance. LH earns revenue by conducting tests
for hospitals, managed care organizations,
employers, and pharmaceutical companies. They
also provide early and late-stage drug
development services to pharmaceutical and
biotech companies worldwide.
Important disclosures appear on the last page of this report.
EXECUTIVE SUMMARY
The diagnostic testing industry is facing public
reimbursement cuts for their services, but LH is best
positioned to combat this. The company’s focus on cost
reduction, ability to generate new revenue streams, and
disciplined acquisition strategy will enable them to
outperform their closest peer, Quest Diagnostics.
LH has this capability thanks to their acquisition of
Covance, which we discuss in more detail below. Drug
companies outsource their pre-market research and
testing to CROs. This type of outsourcing helps drug
companies lower costs and reduce their time-to-market.
Segments
LH stands alone in their focus on automation within the
testing process. As they continue to invest in efficiency
programs and automation, LH will win market share by
delivering faster and more accurate results.
LH’s acquisition focus is on adding unique testing
capabilities. This strategy drives top line growth in areas
that face less reimbursement pressure, and it diversifies
their revenues away from routine testing. Covance also
significantly diversifies the company’s revenue streams.
Not only did they gain access to the contract research
industry, they also created an opportunity for companion
diagnostic tests. Management’s ability to identify new
revenue streams gives LH a durable competitive
advantage in the industry.
We believe the diagnostic testing industry is ripe for
consolidation because small labs are impacted more by
public reimbursement decreases. LH is more targeted
than Quest in their acquisition strategy, and this
discipline will pay dividends as consolidation increases.
Data Source: LH 2014 10-K
LH divides their sales into the three categories (listed
below), and we added Covance as a fourth for forecasting
purposes:
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COMPANY DESCRIPTION
LH lists their founding year as 1971, but they were not
fully formed until 1995, when Roche Biomedical and
National Health Laboratories merged. They named the
united company Laboratory Corporation of America
Holdings.1 LH operates 1,750 patient service centers
where they collect samples directly from patients at the
recommendation of a patient’s primary provider. The
company also receives samples directly from primary care
providers, employers, and pharmaceutical companies.
After collection, LH sends samples to a branch, or
distribution center. Branches serve as a collection point,
processing center, and a home base for the local sales
team. After processing at the branch, the company’s
internal currier service transports samples to one of LH’s
37 primary testing laboratories.2
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Core testing: includes routine tests that are
analyzed overnight and returned to customers by
the next day
Genomic and esoteric testing: includes testing of
genetic markers and rare molecules
Other: includes diagnostic testing operations in
Ontario, Canada
Covance: sales from the newly acquired business
Core Testing
Core testing includes the following types of tests:
In addition to testing patient samples, the company also
provides services to pharmaceutical and biotechnology
companies as a contract research organization, or CRO.
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blood chemistry analyses
urinalyses
blood cell counts
thyroid tests
Pap tests
Hemoglobin A1C
PSA
STD tests (Ct, Ng, Tv, HIV)
HCV tests
microbiology cultures and procedures
alcohol and other substance-abuse tests
federal reimbursement
Medicaid.)
Data Source: LH 2014 10-K
These overnight tests made up 69% of LH’s total test
volumes in 2014, but they carry a lower revenue per test,
or requisition, than genomic or esoteric tests ($39 versus
$62.)2 Unfortunately, the company does not release
margin data for their tests, but we believe core testing
gross margins are lower than genomic and esoteric. The
chart below highlights how total gross margins decreased
as core testing became a larger portion of total revenues.
We believe the reason for core testing’s low margins is
due to the low differentiation among competitors in this
segment and consolidation among healthcare providers
and managed care organizations. These factors pressure
revenues while the costs in core testing remained
constant, resulting in lower margins.
programs
(Medicare
and
The two charts below highlight the shifts in payers and
the revenue per requisition by payer. Managed care
organizations increased slightly from 39% in 2010 to 42%
in 2014, but their revenue per test remained flat. This
leads us to an important concept in the industry. Many
diagnostic labs negotiate contracts with managed care
organizations to pay a certain amount per member per
month, regardless of the number or cost of tests
performed (excluding esoteric tests, which are more
expensive.) While many contracts in the industry are not
exclusive or guaranteed, LH established an exclusive
contract with UnitedHealthcare in 2006, which they
recently extended to 2018. We view this as a positive
because of UnitedHealthcare’s size. By building a strong
relationship with the leading MCO, LH secured a safe and
long-term revenue stream.
Data Source: LH financial statements
Data Source: LH Financial statements
It is difficult to identify a “typical” consumer for core
testing because of the diverse demand drivers.
Consumers range from physicians to employers. It is
important to differentiate between consumers and
customers in this segment. Consumer refers to the end
user, while customer refers to the party paying for LH’s
services. In this case, the most common customers are
managed care organizations, commercial clients, and
Data Source: LH financial statements
Commercial clients make up the next largest customer
group with 40% of total requisitions, which is relatively
flat over the past five years. Commercial client revenues
per requisition rose slightly over the same period.
Commercial clients typically include hospitals, physicians,
and employers. We do not expect this customer base to
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exercise significant pricing pressure in the future because
of its fragmented nature.
Medicare and Medicaid make up nearly 16% of LH’s
revenues, and this is also where the most significant price
reductions occurred. The federal government hopes to
reduce total healthcare expenditures in the United
States, and their first target is diagnostic testing. In 2014,
congress passed the Protecting Access to Medicare Act
(PAMA), which details maximum cuts to diagnostic tests.
From 2017 to 2019, the government can cut a test’s
reimbursement by a maximum of 10% compared to the
previous year. From 2020 to 2022, the government can
cut a test’s reimbursement by a maximum of 15%
compared to the previous year. Below is an example of
the process created by the Center for Medicare and
Medicaid Services (CMS):
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If a test under the Clinical Laboratory Fee
Schedule (CLFS) for 2016 has a payment rate of
$20.00, but the private payor rate calculated
during 2016 produces a payment rate of $15.00,
then the 2017 CLFS payment rate becomes
$18.00 ($20.00-$2.00), the maximum 10 percent
reduction from the current prices.
The following year, a 10 percent reduction would
equal $1.80, lowering the total payment to
$16.20.
The maximum reduction percentage under the
statute is applied to the prior year’s payment
until the reduction becomes less than the
applicable percentage (10 percent or 15 percent)
and the fee schedule payment goes to the
weighted median of the private payor rates for
the test.3
In addition, CMS recently announced that they will not
include hospitals’ internal laboratories when calculating
the private payer rate for each year. This is important
because hospitals typically charge a much higher price
than outsourced labs. Not including hospital lab fees
lowers the target price for Medicare and Medicaid,
resulting in lower revenues for outsourced labs. However,
public payer revenues make up a smaller portion of LH’s
total revenues than their competitors. In light of this, we
believe the impact of reimbursement reductions will have
a muted effect on LH when compared to their
competition.
The final customer group is private patients. These
include those who pay for lab tests without healthcare
coverage or wealthy patients who pay out of pocket.
These patients typically make up less than 2% of total
requisitions, but they pay over $190 per requisition.2
Because their revenue per requisition is over twice that of
other customers, we excluded them from the chart
above. With increased access to healthcare coverage and
penalties for failing to adopt an insurance plan, this
segment will continue to play a minimal role on the
industry and LH’s revenues.
The key drivers for the core testing segment include:
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Consolidation of managed care organizations,
which could lead to a consolidation of power in
LH’s customer base
Reduced reimbursements from public payors,
which is negative for the industry but less
negative for LH
Given the presence of negative drivers for a large portion
of customers in this segment, we expect slow growth
throughout the forecast period. Expect 5% growth for
2015 slowing to 1% growth long-term.
Genomic and Esoteric Testing
LH Genomic and Esoteric Testing Brands
Source: LH 2014 10-K
The genomic and esoteric testing segment makes up 23%
of LH’s overall revenues, but we believe that the higher
revenue per requisition in this segment ($62 versus $39
in core testing) make it a larger contributor to margins.
This segment derives revenues from tests of rare
molecules or genetic markers. Hospitals are more likely to
outsource these tests, unlike many core tests, because of
their expense and the low demand. A few examples of
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the types of tests a hospital might request include tumor
tissue analysis, cholesterol tests, and prenatal genetic
screening. Revenues also come from biotech and
pharmaceutical companies who are required to test their
drugs before and after market release. During
development, drug companies may use labs like LH to
determine how fast their drugs are metabolized, the best
dosage levels, and study the results of their use. After a
drug is approved for use, drug companies are required to
monitor their drug’s performance for a specified period.
During this time, they may use a partner like LH to help
them monitor their drug’s effectiveness and side-effects
on a larger scale.
The main drivers in this segment include:
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Expansion of test capabilities through acquisition
or internal development
Partnership with drug producers to develop tests
for specific drugs in development
Increased demand for genetic tests to identify
predispositions to deadly diseases
First, the increasing the scope of tests offered is one of
the few ways to increase revenues in this segment. This is
because for each test offered, there is a low customer
demand based on the nature of these tests. Offering a
wide variety of tests helps a lab become a go-to partner
for their customers. On this front, LH is particularly active,
adding over 170 new tests in 2014.2 The new tests added
in 2014 include tests centered around cardiovascular
disease risk assessment, infectious disease treatment,
breast cancer tests, coagulation, prenatal screening, and
early detection of childhood genetic diseases. While LH
developed most of their new tests internally, their new
cardiovascular risk test came from their LipoScience
acquisition in September 2014.
Another key driver includes working with drug companies
during development stages to create companion
diagnostics. These are tests that specifically target the
drug or the disease the drug targets. Drug companies use
these tests throughout the drug development process to
produce results for the Food and Drug Administration
(FDA). There is also an opportunity to continue working
with a drug company after their drug hits the market
because the FDA requires them to monitor the drug’s
performance. Establishing a relationship with a drug
company in the development stage increases a lab’s
chances to win their business post-release. This was one
of the driving factors in LH’s acquisition of Covance,
which we discuss in more detail below.
Finally, the demand for genetic tests is increasing due to
the linkage of many diseases and disorders to genetic
causes. Diseases and disorders linked to genetic causes
include cancer, cardiovascular disease, obesity, down
syndrome, cystic fibrosis, sickle cell disease, and many
more. Since the human genome was decoded in 2001, it
became more economical to conduct genomic tests that
target specific areas of the genome. Parents can now test
to see what diseases a future child may be susceptible to,
and doctors can target specific parts of the genome to
treat diseases. We expect demand to continue to rise in
this area, driving requisition growth for LH.
While we like the trends in genomic and esoteric testing,
it is still very difficult to gain economies of scale, because
of the low demand per test. We expect this segment to
grow by 4% in 2015 and 2016, slowing to 2% growth in
2017 and beyond. There is potential for significant
growth in this area when you consider the possible
synergies from Covance. However, these synergies are
difficult to project and it is too early in the integration
process to determine if management’s goals are playing
out.
Other
The final segment of LH’s core business is comprised of
non-US based diagnostic lab operations in Ontario,
Canada. The Canadian subsidiary was added in 2002
though the acquisition of Dynacare, and it makes up 5%
of the company’s revenues. This segment provides clinical
lab testing services to the Ontario Ministry of Health, and
we expect it to grow at 1% throughout the forecast
period.4 We based our expectations on the low
bargaining power of LH in Ontario, especially when
compared to their business partners, who are backed by
the government. We also believe that the historically flat
testing volumes will continue throughout the forecast
period.
Covance
Before LH acquired Covance in February 2015, Covance
was the second biggest contract research organization
(CRO) for pre-clinical work and a top 10 competitor for
late-stage trials. The company is also the only worldwide
CRO capable of working through the entire drug
development process.4
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Pre-clinical services include in vivo (or in body)
testing of drug effects, toxicology measurement,
pharmachemistry (metabolic profiling and
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bioavailability of drugs), nutritional chemistry and
food safety services (food labeling, pesticide
screening), and production of specialized
research products (test animals)
Clinical pharmacology services include first-inhuman drug trials and patient proof-of-concept
studies
Central lab services include the processing of trial
results and data generation for published results
Clinical development services include the
management of clinical trials throughout the
development process2
Covance’s primary customers are pharmaceutical and
biotechnology companies, universities, and government
entities. These companies outsource the processes listed
above to CRO’s in order to reduce their cost of drug
development and testing. Covance and their competitors
offer their clients cost savings through their large
network of trial participants and knowledge of the trial
process. This enables biotech companies to focus on
identifying new target molecules and pharmaceutical
companies to focus on marketing and selling their drugs
in the marketplace.
While cost savings are the primary reason for
outsourcing, numerous factors drive which CRO a client
chooses. CROs differentiate themselves by focusing on
either a specific illnesses or a wide range of diseases.
Likewise, some CROs have strengths in a particular stage
of the development process, while others offer
comprehensive services. Covance elected to use the
broad approach, which enables them to work with both
biotech and pharmaceutical clients. As we discuss in the
industry trends section, the funding flow for these two
types of customers are cyclical. Working with both
provides Covance with revenue stability. The company’s
global scale also sets them apart, because many CROs are
not able to tackle the unique drug development
regulations in different countries
LH expects to derive revenue synergies by 2018 from
three key factors, and we believe two additional factors
will affect the combined company’s profitability going
forward.
1. Faster clinical enrollment (>$150 million) – LH has
a large network of patients and healthcare
providers, and they maintain a detailed database
of patient information. Prior to merging, Covance
reached out to individual hospitals directly to
source possible candidates. The combination
enables Covance to leverage LH’s network and
information to source potential participants.
2. Companion diagnostics (>$100 million) – As
Covance works through the drug development
process with a client, they gain key knowledge
about the drug and the illness. The combined
company will use these insights to develop
diagnostic tests, which drug companies can use
to test the effectiveness of their products after
they hit the market.
3. Post-market surveillance (>$50 million) – This is
the one aspect of the drug development process
where Covance was weakest, and it is also an
area where LH had existing services. Combining
these with Covance gives the company a truly allencompassing platform of services.5
In addition to these drivers, we believe the combined
company will derive tax benefits because of Covance’s
geographic diversity. LH operates primarily in the United
States with a marginal tax rate of nearly 35% in 2014.2
The chart below indicates that Covance derives a majority
of their revenues outside the United States, where tax
rates are generally lower. In Covance’s most recent
stand-alone filing (Q3 2014) they posted a 23% tax rate.6
Going forward, we expect the combined company to
operate at just over a 32% tax rate.
Data Source: KeyBanc
We also expect the combined company to experience
increased exchange rate sensitivities in the future.
Covance’s international exposure negatively affected
their performance as the U.S. dollar strengthened. As the
Fed decides what to do with interest rates, dollar
strengthening will become a bigger concern for LH. We
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expect strengthening and weakening cycles to neutralize
each other in the long term.
We project Covance’s revenues to decline 1.5% in 2015 as
they integrate with their larger partner. The chart below
highlights how our projections impact the combined
company’s revenue distribution for 2015. By 2017, the
segment will benefit from the cyclical recovery in early
stage funding (discussed in the industry trends section),
resulting in 4% growth.
square foot system conducts pre-testing processes
ranging from removing caps to applying barcodes. 7 As a
result of LH’s automation focus, they reduced human
errors in testing and improved per-employee throughput
by 50% since 2008.2 These efficiencies also benefit the
top line because they produce results more quickly and
accurately, which creates repeat customers.
LH also announced Project LaunchPad in 2015. This
program is a company-wide efficiency initiative that will
examine the company’s systems of procurement,
customer billing, and patient servicing. Management
expects Project LaunchPad to result in $100 million of
savings over the next three years.2
Another important aspect of LH’s potential is the debt
they took on to acquire Covance. The company’s
historical target leverage ratio (Total Debt / EBITDA) was
2.5x. However, after issuing bonds and taking out loans to
pay for Covance, their leverage ratio rose to over 4.5x.
Management believes they can get back to their target
ratio by late 2016 or 2017, after which they would begin
to consider buybacks or acquisitions again. The chart
below highlights the manageable debt maturity schedule
for LH. We trust management’s ability to pay down this
debt early based on the company’s strong operating
margins and cash generation.
Data Source: Henry Fund Estimates
Company Analysis
LH Debt Maturity Schedule
LH continues to set themselves apart by focusing on the
development of genomic and esoteric tests, while their
competitors focus on growing their core testing base. We
believe this strategy will continue to benefit LH because
hospitals cannot conduct their own esoteric tests. This
focus also enabled LH to capture higher profitability in
the past, which the company used to fund acquisitions
and repurchase shares.
While the company uses acquisitions and internal test
development to drive top line growth, we believe LH’s
focus on cost reduction make them a particularly good
investment compared to their peers. First, LH’s initiatives
in automation will continue to drive margins above their
peers. These efforts date back to 2007, when LH acquired
a lab testing robotics company named Protedyne. LH
used Protedyne’s Radius system to automate the
unscrewing of caps from pap smear tests. LH also uses
automation in blood testing. Their system enables them
to process 20,000 samples per night with 19 employees in
their Burlington, NC headquarters. The same process
used to take 42 employees and yielded only 8,000 results.
In 2014, the company began installing the Propel robotic
system in several of their major laboratories. This 4,000
Source: Thomson One
Overall, we expect LH to see limited revenue growth (just
over 4% in 2016, slowing to 1.5% long-term) due to
reimbursement pressure. However, LH should rise above
Quest Diagnostics because their exposure to public
payers is lower. Recent announcements regarding
reimbursements should affect Quest more negatively.
From a cost cutting perspective, LH has a distinct
advantage thanks to the focus of their management
team. We believe that LH will continue to create value
through the revenue and tax synergies from the Covance
acquisition. We also expect LH to win market share
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providing a wider variety of tests and faster and more
accurate results. They will accomplish this through
continued investments in their test offerings, automated
processes, and Project LaunchPad.
RECENT DEVELOPMENTS
Q2 2015 Results
LH completed their second quarter in June 2015 and
reported their performance on July 28, 2015. The
company’s reported $2.09 earnings per share
outperformed consensus estimates of $2.03, and overall
earnings per share guidance were also increased.8
Q2 2015 Results vs. Consensus
(in 000’s except EPS)
Reported
Consensus
Revenue
$2,269
$2,190
EPS
$2.09
$2.03
Data Source: WF Q2 Analysis
their decisions would be contrary to all of their actions
leading up to this point.
The news removed a significant overhang from both LH’s
and Quest Diagnostic’s stock prices. Analysts knew an
announcement was coming from CMS this fall, but the
exact date and details were unknown. As a result, LH’s
stock traded in a tight range over much of the summer.
Since the September 28 announcement, LH narrowly
outperformed the overall market gaining just over 8% by
October 16 (Quest Diagnostic matched the overall
market’s performance during this period.
We view the CMS release as a non-material event. The
news was not positive, but more importantly, it was not
more negative than expected. We still expect
reimbursement challenges beginning in 2017, and
revenue growth in each subsequent year for LH (3.0% in
2017, 2.0% in 2018, and 1.5% in 2019.)
INDUSTRY TRENDS
The market responded positively to the news, nearly
driving the stock price above its all-time high of $128 by
the end of July. However, world-wide economic events
took their toll on LH’s stock, which has underperformed
the S&P 500 since August.
Drug Development Funding
Historical Biotech Funding
Despite the good news, Covance’s revenue growth was
downgraded to -1.5-0.5% from 0.0-2.0% based on
continued currency exchange challenges. We expect
Covance to exit this year with revenue growth of -1.5%,
at the low end of management’s guidance. Once fully
integrated, we expect Covance to achieve a higher
growth rate of 4% in 2016. This projection is also driven
by the neutralization effect of exchange rates in the long
term.
PAMA Announcement
In September 2015, CMS made a much-anticipated
announcement regarding PAMA. They announced that
when calculating reimbursement rates, they would not
include hospital labs. This is important because the costs
and rates are higher in hospitals than they are at a
diagnostic testing center operated by LH or Quest.9
The industry is likely to argue for hospital inclusion during
the public comment period, which lasts until late
November.9 However, we believe they are unlikely to be
successful, because CMS has made it very clear that they
are targeting diagnostic testing companies. Changing
Source: Jeffries10
While the major driver in the diagnostic testing industry is
decreasing reimbursement rates, the driver for CRO’s is
increased spending on drug development. Currently at
all-time high levels, funding for biotech drug
development is tracked through initial public offerings
and start-up funding. Biotech companies typically identify
a target molecule or disease that they wish to treat. Then,
they begin testing different methods of treatment, either
internally or through a CRO.
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William Blair conducts regular surveys of biotech and
pharmaceutical companies to gain insights on their future
research and development spending. The most recent
survey, published on October 15, highlighted strong
future growth expectations. Biotech companies lead the
way with over 8% R&D growth expected each year
through 2018. Larger pharmaceutical companies, on the
other hand, have more moderate growth expectations.
R&D Budget Growth Expectations
(by company size)
who focus on a particular stage will see more cyclical
results. Our analysis of company stock performances
during these cycles shows that Charles River and ICON
are most correlated to trends in early stage funding,
while Covance, Quintiles, and Parexel have a more
balanced historical performance. Because both trends
will end by 2017, we expect slower growth for Covance
after 2017, with 2% growth in 2018 and 2019.
Outsourcing by Pharmaceutical Companies
While increased R&D spending is a good thing, the only
way it affects CRO’s is through outsourcing.
Pharmaceutical companies are increasingly outsourcing
parts of the drug development process because of the
increasing complexity and globalized nature of trials. The
William Blair survey suggests that there is room for
growth in outsourcing, but they also suggest that
outsourcing is approaching its maximum penetration.
Source: William Blair11
Nearly 50% of biotech companies surveyed were likely to
cut R&D spending if capital markets become significantly
weaker. While this insight is not particularly specific, it
does indicate how volatile markets can influence R&D
spending at small firms.11
Overall, funding tends to be very cyclical, with the cycles
in early and late stage funding typically occurring
independently. Below is a chart depicting the most recent
funding cycles and our expectations for the current
funding cycles. Based on the historical length of early and
late stage cycles, we expect the current late stage cycle to
end at the conclusion of this year. We suspect early stage
funding reached its midpoint peak in 2014 or mid-2015,
and there are at least two years left in the cycle.
The survey also examines drug companies’ preference for
a specific CRO, and the data reflects positively on the
LH/Covance team. When asked which CRO was best
positioned to increase clinical trial efficiency, 37% of large
pharma and 26% of biotech companies chose LH. The
next highest selection was Quintiles with 25% of large
pharma and 17% of biotech companies.12 This adds
credence to the synergies LH suggested as key drivers of
their acquisition.
Finally, the survey also highlights which CRO’s are favored
for a particular stage of the drug development process.
Listed below are the leaders by each phase of the
development process:
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Early and Late Stage Funding Cycles
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Data Source: Jeffries10 and Henry Fund Estimates
This suggests that companies like LH/Covance, who have
a strong reputation with both early and late stage
development, will benefit. On the other hand, companies
Discovery: LH and Charles River shared the topspot with 24% each
Pre-clinical: LH lead this segment with 28% and
Charles River had 24%
Phase I: Quintiles and LH both registered 22%,
but LH was up from 21% in the previous survey
while Quintiles was flat
Late Stage: Quintiles lead with 21% (down from
23% last survey), while Covance came in second
with 19% (up from 17% in the previous survey)
The William Blair survey highlights the business LH can
win through their acquisition of Covance. We believe they
are well positioned to take advantage of increased
funding in any stage of the development process.
Strength within the drug development process also
increases the opportunity for companion diagnostics,
Page 9
which was another key aspect of the Covance acquisition.
While we do not project any funding cycles beyond 2017
(just as we do not typically project acquisitions), and we
expect Covance to show strong growth in 2016 and 2017.
However, these expectations must be tempered by the
fact that Covance will continue to suffer from currency
headwinds until the world economic system fully
recovers. This results in 4% growth for both 2016 and
2017.
MARKETS AND COMPETITION
The market for diagnostic testing is very fragmented with
many small players working with a specific hospital in
their geographic area. However, the top two competitors,
LH and Quest Diagnostics, have a combined 31% of the
market share. Beyond LH and Quest, it is difficult to find a
competitor with a market share greater than 1%. Our
analysis will focus on the competition between LH and
Quest, as well as the other options available for
diagnostic testing.
Market Share
Quest,
16%
LabCorp,
15%
Others,
69%
Data Source: Barclays13
Companies in the diagnostic testing market differentiate
themselves in several ways. The first differentiator is size.
The top two companies, LH and Quest, opted to grow by
buying individual labs and using the efficiencies of scale
to improve their profitability. Second, a company may
select to work with a specific type of payer. For example,
LH has a stronger focus on managed care patients, while
Quest Diagnostic leans slightly more on public payers.
Another key point of differentiation emerged recently
when LH opted to acquire a CRO. Quest followed suit in
2015, but they decided to form a joint venture with a
CRO, Quintiles.
Test companies win business by providing inexpensive,
but trustworthy, testing results. The ability to provide
quality tests quickly is also a differentiator. The final
aspect of differentiation is the scope of testing
capabilities offered. While a hospital’s internal testing lab
may be able to handle certain core tests, many tests are
outsourced because it is expensive to tests for rare
diseases that have a low occurrence. Small regional labs
offer a wider testing capability, but LH and Quest provide
a significantly larger array of tests. Given the choice to
work with multiple test laboratories based on each lab’s
capabilities or one comprehensive lab seems like an easy
choice. However, industry fragmentation leads us to
believe that hospitals are not focusing on this decision
yet, opting to meet government requirements for IT
system implementation and trying to improve their
revenue cycle management processes. We are confident,
that over time, hospitals will realize the cost savings and
efficiencies of working with a comprehensive lab. This will
increase the market share of both LH and Quest, leaving
many regional labs with the option of going out of
business or joining one of the two leaders.
The CRO market is more dynamic with a longer list of
competitors and competitive strategies. However, when
Covance joined LH, we believe it changed the competitive
landscape. Covance was already a top CRO, and now they
will have even more selling points. These include faster
trials, better data analysis, and the opportunity to work
with one CRO throughout the entire development
process. CROs typically specialize in a particular area of
the development process or work with drug companies of
a particular size. Covance now has the opportunity to hit
all markets, and they are also one of the few to operate
internationally. We believe this will help them build even
stronger relationships with large pharma companies who
have the ability to develop drugs for a wide range of
countries or geographic regions. Again, this creates the
opportunity for clients to work with several CRO’s or one
comprehensive company.
Operating Efficiency and Debt Comparison
Op.
Total Debt-toTicker Margin ROE
ROA
Equity
Diagnostic Test Companies
DGX
15.3%
12.6
7.4
86.3
LH*
15.7%
11.5
6.4
141.8
Contract Research Organizations
Q
8.3%
12.4
PRXL
10.5% 23.8
7.2
53.3
ICLR
16.4% 10.1
20.8
5.9
CVD*
11.1% 11.4
7.0
16.0
*Pre-acquisition statistics
Data Source: FactSet and Company Financial Statements
Page 10
Peer Comparisons
Our peer comparison will focus on LH’s only other large
peer and a new entrant with the potential to disrupt the
industry.
Quest Diagnostics (DGX)
When we examine the revenue growth of each company
over the same time period, we find that although DGX
made more acquisitions, they have not overcome any
pricing or volume issues the company is fighting. LH on
the other hand, has been able to translate their shorter
deal list into revenue growth for each year since 2011.
Revenue Growth
DGX represents the best pure comparison to LH’s
business, and the two companies have pursued a similar
strategy historically. As a result, the two company’s stock
prices are strongly correlated, with a correlation
coefficient of 0.93 over the past five years. However,
there has been a slight divergence in the past year as the
correlation coefficient shifted to 0.89.
15.0%
10.0%
5.0%
0.0%
-5.0%
2011
2012
DGX
2013
2014
LH
Data Source: Company financial statements
While both companies actively pursue growth through
acquisition, it appears that LH is more targeted. Below is
a list of each company’s acquisition activity since 2011.
For many deals, companies do not disclose the price paid.
Acquisitions Since 2011
The other aspect that may produce future
outperformance for LH is the fact that they acquired a
CRO, while DGX created a joint venture. We believe that
both strategies provide good revenue opportunities.
However, fully incorporating Covance significantly
diversifies LH’s payer mix and decreases its tax base due
to Covance’s international exposure. Because of LH’s
targeted acquisition strategy, revenue diversity, and
lower exposure to public payers, we believe LH will
outperform DGX over our forecast period.
Theranos
Theranos Sample Size Compared to Typical Sample
Data Source: Mergent
Source: Company website14
Page 11
Theranos is a relatively young diagnostic test device
maker, and many think their device, Edison, has the
opportunity to disrupt much of the diagnostic testing
industry. The device enables Theranos to charge prices
50-80% below Medicare reimbursement rates, with over
150 tests priced below $10. The company claims that
their tests are conducted in under 15 minutes, and they
require a significantly smaller sample.14
The company does not sell their devices, but they use
them in their testing centers in Arizona (42 centers),
California (2 centers), and Pennsylvania (1 Center.)
Because the company does not sell their devices, they are
not required to gain FDA approval for the validity of their
tests. However, the company began submitting their tests
to the FDA voluntarily, gaining their first FDA approval in
2015.15
Because this technology could displace much of the
diagnostic testing conducted by LH and DGX, investors
have jumped in, driving the company’s valuation over $9
billion. However, a recent front-page article in the Wall
Street Journal brought several issues to light. The article
calims that a vast majority of the company’s tests are not
conducted by Edison, but with standard testing machines.
To bring their small samples up to the required size for a
regular testing machine, they are often diluted. Sources
in the article state that diluting samples leads to less
reliable results, which the article also discusses in detail. 16
While Theranos does highlight the opportunity for
disruption in the industry, we believe that a company
must pursue the typical validation processes before their
technology is accepted by the public and medical
industry. The scientific and medical communities act as a
barrier to entry for start-ups, and we believe this protects
companies like LH and DGX from disruption.
ECONOMIC OUTLOOK
belts, it is up to Covance to show how their services
reduce development costs for their clients. If a drug
company does not see past the initial investment or
Covance cannot compete through price, their growth
could be significantly lower than our forecasts.
Healthcare Spending
Healthcare spending in the United States is expected to
increase at a 5.8% CAGR through 2020, and we believe
this is a positive driver for LH.17 When combined with the
increased access to healthcare, we expect testing
requisitions to continue their increase. However, labs are
one of the first targets that the federal government is
examining to help reduce the U.S.’s healthcare spending.
Reduced reimbursements from Medicare will make the
growth in requisitions less profitable than analysts
previously expected.
LH has a slightly lower exposure to Medicare and
Medicaid patients compared to DGX, but we still expect
reimbursement cuts to counteract increased healthcare
spending. Expect diagnostic testing revenue growth to
slow to 3% in 2017, with further slowdowns in 2018 and
2019.
Interest Rates
The Federal Reserve decided not to raise rates in
September, but we still expect rates to increase at the
end of 2015 or beginning of 2016. LH is highly levered as
a result of their recent acquisition, but they have the cash
flows to reduce their debt quickly. We do not expect the
company to take on more debt in the near future, but
they may require funding to continue their acquisition
strategy in after 2017. The fragmented diagnostic test
industry is ripe for consolidation, and we expect both LH
and DGX to continue making acquisitions going forward.
Currency Exchange Rates
GDP Growth
We forecast real GDP to grow 2.98% over the next two
years with 1.59% growth in inflation. Our expectations
are primarily driven by lower world-wide demand for U.S.
products and neutral consumer confidence. However, we
believe these impacts will have a relatively small impact
on LH and the diagnostic testing industry, because testing
is driven by medical necessity and access to healthcare.
Covance would be more significantly impacted by a global
slowdown, however, because of its international
exposure. As international drug companies tighten their
The introduction of Covance’s international exposure to
LH’s income statement increases their exposure to
currency exchange rates, which the company does not
hedge. As the U.S. dollar strengthens, Covance’s top line
growth is restricted. We expect the strong dollar
environment to continue through 2017 as the Fed
increases interest rates, China tries to right their ship, and
Europe continues to struggle with Greece’s debt crisis.
Our two-year forecast for the USD/EUR exchange rate is
1.13, just above the current 1.12.
Page 12
together in 2016, but there is still a risk that the two
unique businesses are too different to synchronize.
CATALYSTS FOR GROWTH
Covance Synergies
We agree with LH’s management regarding the revenue
synergies from their Covance acquisition. While many
analysts were skeptical initially, the company has done a
good job of convincing them that the deal will be a
growth driver. DGX’s move to partner with Quintiles,
adds credence to LH’s Diagnostic/CRO strategy. While
Covance is a lower margin business, we believe LH will
benefit from sales growth that was not possible as a
standalone company. Additionally, Covance will likely see
margin expansion as a result of the deal, because LH’s
patient network becomes a significant selling point for
their services. Finally, we believe that the diversification
of LH’s revenues (in terms of payer and geography)
significantly decreases their risk as a company.
Project LaunchPad and Testing Automation
LH’s leads the industry in their efforts to automate testing
processes. We believe that continued investments will
help them combat industry-wide margin declines. We
also expect Project LaunchPad to drive margins in the
future, because of its potential to eliminate
redundancies. In an industry where margins are likely to
decline, we believe LH has the best possible strategy to
respond.
INVESTMENT POSITIVES
•LH’s management team has a history of making timely
investment decisions that drive top line and operational
synergies (Covance acquisition, investments in
automation.)
• They also return half of the company’s free cash flow to
investors, a process that should resume after paying
down debt.
•Investing in LH provides exposure to biotech and
pharma without the risks. Because the company works
with both companies on drug development projects in
multiple stages, they are diversified enough to avoid any
firm specific risks.
INVESTMENT NEGATIVES
•It is a foregone conclusion that pricing pressure will
occur among public payment systems. We like LH’s low
exposure versus Quest, but pricing pressure is never a
good thing.
•As managed care organizations consolidate, their
bargaining power increases. Winning contracts with
MCOs is important because of the sheer volume of
requisitions, but we would re-examine our investment if
price competition becomes the new norm.
VALUATION
Sales Growth
We projected LH’s revenues using their pre-Covance
segments and the addition of Covance as a unique
business segment. The core testing and genomic and
esoteric testing segments will be most impacted by public
payer reimbursement cuts. These cuts, which are likely to
occur each year beyond 2017, will slow revenue growth
in LH’s core business units. The other segment, which
serves the Ontario Ministry of Health is expected to grow
at 1% each year throughout the forecast period because
of the lack of growth drivers and LH’s low bargaining
power in Canada. Finally, we expect Covance to decline
1.5% in 2015 due to currency exchange issues and the
prevalence of longer-term projects. However, we expect
Covance will recover in 2016 and 2017, driven by strong
funding for early stage drug development.
Sales Growth Estimates
2015
2016
Diagnostic
5.0%
5.0%
testing
Genomic
and esoteric 4.0% 4.0%
testing
Other
1.0%
1.0%
Covance
-1.5%
4.0%
Total sales
43.8% 4.3%
Source: Henry Fund Estimates
2017
2018
2029
3.0%
2.0%
1.0%
2.0%
2.0%
1.0%
2.0%
2.0%
1.0%
2.0%
1.5%
2.0%
1.0%
4.0%
3.0%
Gross Margins and COGS
•After two quarters as a combined company, Covance is
still not firing on all cylinders. We expect things to come
Gross margins declined from nearly 42% in 2010 to 37%
in 2014 due to flattening revenues per requisition. We
Page 13
expect that LH’s gross margins will stabilize between 35%
and 34% throughout the forecast period. In 2017, we
expect COGS to grow 1% to 65% of sales because of the
operational synergies from the addition of Covance. As
the two companies integrate, the drivers listed in our
description of the acquisition will fuel market share gains
and stronger broader relationships.
and implied forward-looking data. Next, we used a cost of
debt based an existing LH bond with a maturity of
February 2045. The table above in our discussion of gross
profits also displays the sensitivity of our discounted cash
flow model to our WACC assumptions.
Sensitivity Analysis of Continuing Value Year’s Cost
of Sales
Sensitivity Analysis of Beta Calculation
Beta Calculation
Capital Expenditures
We projected LH’s capital expenditures based on the fiveyear historical average ratio of net plant, property, and
equipment to sales. The chart below highlights the spike
in 2015, which is due to the incorporation of Covance’s
assets. We expect future annual expenditures to be
nearly half of 2015.
We calculated LH’s beta to be 0.86 by taking an average
of their one and two-year weekly betas. We chose this
time period because changes in the healthcare industry
make any longer period less meaningful. While this beta
is generally in line with betas of other diagnostic testing
companies and CRO’s, we do not believe it is a perfect
description of the company’s risk. This is because it does
not include assumptions about the risk of integrating
Covance. If the integration goes poorly, we believe LH
could pay the consequences for years to come. However,
we believe that artificially inflating our beta would not
provide a more accurate estimate, and we feel that 0.86
is the best number available.
Valuation Model Results
Our DCF/EP model results in a target price of $137, which
we feel is our most accurate projection. This is primarily
because of the difficulties applying the other models
described below. Our DCF price is below the current
consensus price of $141 for a variety of reasons including
differences in long-term growth rates, margin
expectations, cost of debt, beta, and WACC.
WACC Calculation
We used a weighted average cost of capital of 6.12% in
our models. We calculated this by making several
assumptions. First, we used a risk-free rate of 2.87%. This
was the 30-year Treasury bond yield at the time of our
report. While this rate may increase in the future, we feel
that it is the best long-term rate available. We also
selected a market risk premium of 4.85%. This premium is
the Henry Fund consensus estimate based on historical
Our dividend discount model produces a target price of
$128, which is below our DCF forecast but above the
current stock price. We feel this is less reliable because
LH does not currently pay a dividend, and we do not
expect them to. The company primarily generates
shareholder returns through stock repurchases
Lastly, our relative valuation model generates a price of
$127. We believe this number is more reliable than our
Page 14
DDM target price, but it is flawed for several reasons.
First, our peer group contains companies who operate in
different industries. We included DGX, but we also
included four CRO’s because they compare with the
Covance segment. LH trades at a premium to DGX, and
we believe this is justified based on our comparison of
the two companies, which was discussed above.
For the reasons listed above, we used our DCF model
results to generate our target price range. Through our
sensitivity analysis of key variables, we arrived at the
target price range of $129 to $143.
6.
7.
8.
9.
10.
11.
KEYS TO MONITOR
Margins are the most important factor to watch for LH
going forward. We anticipate revenues to stabilize over
time, but we would grow concerned if operating margins
fell below 10%. It is helpful to compare magins to DGX
since the companies are so similar. Currently, they both
have operating margins near 15%, and we expect DGX ‘s
margins to approach 11% while LH’s stabilize near 13%.
It is also important to monitor LH’s debt levels going
forward. Management promised to hold off on all share
repurchases until they can achieve a leverage ratio of
2.5x. If the company makes any large acquisitions or fails
to decrease their outstanding debt, we would begin to
question management’s commitment to their goal.
Lastly, reimbursement news has the potential to
negatively impact the company’s stock without much
upside. In general, the market understands that cuts are
coming, and we anticipate Medicare reimbursement cuts
will be maxed out at 10% each year. If there are any
updates that make this number more clear, we would
include them in the model. We do not expect any further
discussion of reimbursement rates until late 2016, when
the final numbers will be released for 2017’s cuts.
REFERENCES
1.
2.
3.
4.
5.
Company website: www.labcorp.com
LH 2014 10-K
Center for Medicare and Medicaid Services website:
https://www.cms.gov/Newsroom/MediaReleaseDat
abase/Fact-sheets/2015-Fact-sheets-items/2015-0925-2.html
Hooker, Donald. “LH: Initiating Coverage at
Overweight” KeyBanc Capital Markets. 15 June 2015
2015 UBS Global Healthcare Conference
Presentation
12.
13.
14.
15.
16.
17.
Covance Q3 2014 10-Q
McGowan, Molly. “Test Site” Times News. 23
November 2013.
Lieberman, Gary. “LH: Lowered Covance Revenue
Guidance Overall Solid Quarter but Slower Growth in
Clinical Business” Wells Fargo. 28 July 2015
Gill, Lisa. “PAMA Proposal Excludes Hosptial Rates
but Could Still Remove Overhang; Introducing 2017
Estimates” J.P. Morgan. 28 September 2015
Windley, David. “R&D Higher, Biotechs Richer, CROs
Happier; Upgrading Q to Buy” Jeffries. 254 April
2015.
Kreger, John. “Results from Fall 2015 Survey of
Biopharmaceutical Sponsors” William Blair. 15
October 2015.
Murphy, Amanda. “CRO Survey Hilights Robust
Trends for CRO Space and Positive Views of
LabCorp/Covance’s Positioning” William Blair. 15
October 2015.
Meehan, Jack. “Prolonged Turnaround Showing
Signs of Improvement: Initiate Equal Weight”
Barclays. 2 March 2015.
Theranos company website: www.theranos.com
Theranos company press release:
https://www.theranos.com/news/posts/statementfrom-theranos
Carreyrou, John. “Hot Startup Theranos Has
Struggled With Its Blood-Test Technology” The Wall
Street Journal. 16 October 2015.
IBISWorld: Total Health Expenditure
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential
employers and other interested parties an example of the
analytical
skills,
investment
knowledge,
and
communication abilities of Henry Fund students. Henry
Fund analysts are not registered investment advisors,
brokers or officially licensed financial professionals. The
investment opinion contained in this report does not
represent an offer or solicitation to buy or sell any of the
aforementioned securities. Unless otherwise noted, facts
and figures included in this report are from publicly
available sources. This report is not a complete
compilation of data, and its accuracy is not guaranteed.
From time to time, the University of Iowa, its faculty,
staff, students, or the Henry Fund may hold a financial
interest in the companies mentioned in this report.
Page 15
Laboratory Corporation of America Holdings
Revenue Decomposition
Fiscal Years Ending Dec. 31
Clinical diagnostics laboratory
Core testing
YoY Growth
Genomic and esoteric testing
YoY Growth
Other
YoY Growth
Covance
YoY Growth
Total
YoY Growth
Covance
YoY Growth
2012
2013
2014
2015E
2016E
2017E
2018E
2019E
3,246,600
3.27%
2,089,800
0.04%
335,000
8.27%
3,445,100
6.11%
2,020,100
-3.34%
343,100
2.42%
3,656,600
6.14%
2,025,600
0.27%
329,400
-3.99%
5,671,400
2.33%
5,808,300
2.41%
6,011,600
3.50%
3,839,430
5.00%
2,106,624
4.00%
332,694
1.00%
2,366,278
-1.50%
8,645,026
43.81%
4,031,402
5.00%
2,190,889
4.00%
336,021
1.00%
2,460,929
4.00%
9,019,241
4.33%
4,152,344
3.00%
2,234,707
2.00%
339,381
1.00%
2,559,367
4.00%
9,285,798
2.96%
4,235,390
2.00%
2,279,401
2.00%
342,775
1.00%
2,610,554
2.00%
9,468,120
1.96%
4,277,744
1.00%
2,324,989
2.00%
346,203
1.00%
2,662,765
2.00%
9,611,701
1.52%
2,095,938
8.84%
2,180,621
4.04%
2,402,313
10.17%
2,366,278
-1.50%
2,460,929
4.00%
2,559,367
4.00%
2,610,554
2.00%
2,662,765
2.00%
Income Statement
2012
2013
Net sales
5,671,400 5,808,300
Cost of sales
3,421,700 3,585,100
Gross profit
2,249,700 2,223,200
Selling, general & administrative expenses
1,114,600 1,128,800
Amortization of intangibles & other assets
86,300
81,700
Restructuring & other special charges
25,300
21,800
Operating income (loss)
1,023,500
990,900
Other income (expenses)
Interest expense
94,500
96,500
Equity method income, net
21,400
16,900
Investment income (loss)
1,000
2,200
Other income (expenses), net
(7,200)
2,100
Earnings before income taxes
944,200
915,600
Provision for income taxes
359,400
340,200
Net earnings (loss)
584,800
575,400
Less: Net income attributable to noncontrolling interest
(1,700)
(1,600)
Net income attributable to Laboratory Corporation
583,100
of America573,800
Holdings
Shares outstanding-basic
95,700
90,200
Net earnings (loss) per common share-basic
$6.09
$6.36
2014
6,011,600
3,808,500
2,203,100
1,198,200
76,700
17,800
910,400
109,500
14,300
1,100
10,400
826,700
314,100
512,600
(1,400)
511,200
84,800
$6.03
2015E
2016E
2017E
2018E
2019E
8,645,026
5,532,817
3,112,209
1,729,005
73,790
48,706
1,260,708
9,019,241
5,772,314
3,246,927
1,803,848
73,790
50,815
1,318,474
9,285,798
6,035,769
3,250,029
1,857,160
73,790
52,316
1,266,763
9,468,120
6,154,278
3,313,842
1,893,624
73,790
53,344
1,293,084
9,611,701
6,247,606
3,364,095
1,922,340
73,790
54,153
1,313,813
216,126
22,294
2,062
(2,019)
1,066,919
348,814
718,105
(10,208)
707,898
100,351
$7.05
202,933
23,259
2,151
(2,106)
1,138,845
372,329
766,516
(10,650)
755,866
100,351
$7.53
185,716
23,946
2,215
(2,168)
1,105,040
361,277
743,763
(10,964)
732,799
100,274
$7.31
189,362
24,417
2,258
(2,211)
1,128,186
368,844
759,342
(11,180)
748,162
100,202
$7.47
192,234
24,787
2,292
(2,245)
1,146,413
374,803
771,610
(11,349)
760,261
100,135
$7.59
Balance Sheet
2012
2013
2014
2015E
2016E
2017E
2018E
2019E
Assets
Current assets
Cash & cash equivalents
Accounts receivable, net
Supplies inventories
Prepaid expenses & other current assets
Deferred income taxes
Total current assets
Property, plant & equipment, gross
Less accumulated depreciation & amortization
Property, plant & equipment, net
Goodwill
Intangibles assets, net
Joint venture partnerships & equity method investments
Other assets, net
Total assets
466,800
718,500
121,000
74,600
10,900
1,391,800
1,575,700
944,900
630,800
2,901,700
1,667,700
78,100
124,900
6,795,000
404,000
784,700
136,500
106,900
1,432,100
1,731,900
1,024,500
707,400
3,022,800
1,572,000
88,500
143,100
6,965,900
580,000
815,700
139,500
157,500
1,692,700
1,813,000
1,026,500
786,500
3,099,400
1,475,800
92,600
154,800
7,301,800
496,347
537,982
435,658
607,780
1,420,101
1,132,081
187,949
329,799
32,800
2,178,976
3,763,299
1,931,499
901,498
6,136,600
3,644,800
68,600
197,400
13,127,874
1,181,085
196,072
344,075
2,259,215
5,007,577
3,951,464
1,056,113
6,136,600
3,571,010
69,286
217,695
13,309,919
1,215,992
201,867
354,244
2,207,760
6,094,903
5,007,577
1,087,326
6,136,600
3,497,220
69,979
224,129
13,223,013
1,239,867
205,831
361,199
2,414,677
7,203,578
6,094,903
1,108,675
6,136,600
3,423,430
70,679
228,529
13,382,589
1,258,669
208,952
366,677
3,254,399
8,329,065
7,203,578
1,125,488
6,136,600
3,349,640
71,385
231,995
14,169,507
Liabilities and shareholders' equity
Current liabilities
Accounts payable
Accrued expenses & other current liabilities
Unearned revenue
Total short-term borrowings & current portion of long-term debt
Total current liabilities
Long-term debt, less current portion
Deferred income taxes & other tax liabilities
Other liabilities
Total liabilities
236,900
311,600
480,000
1,028,500
2,175,000
546,000
307,400
4,056,900
304,500
310,000
9,900
111,300
735,700
2,889,100
563,900
266,500
4,455,200
282,300
341,400
5,500
347,100
976,300
2,682,700
530,400
274,200
4,463,600
438,800
567,700
142,500
674,100
1,823,100
5,029,888
1,372,600
375,133
8,600,721
431,462
356,200
523,269
1,310,931
4,091,390
1,336,276
391,371
7,129,967
444,214
372,457
456,035
1,272,706
3,344,255
1,300,913
402,938
6,320,811
452,936
379,770
420,252
1,252,958
2,812,459
1,266,486
410,849
5,742,752
459,805
385,529
426,989
1,272,323
2,857,542
1,232,970
417,080
5,779,914
20,700
19,400
17,700
17,058
16,439
15,843
15,268
14,714
Noncontrolling interest
Common stock
Retained earnings (accumulated deficit)
Treasury stock, at cost
Accumulated other comprehensive earnings (loss)
Total shareholders' equity
11,300
3,588,500
(951,800)
69,400
2,738,100
10,500
3,373,500
(958,900)
66,200
2,510,700
10,400
3,786,100
(965,500)
(10,500)
2,838,200
1,889,600
4,493,998
(965,500)
(10,500)
5,424,656
1,889,648
5,249,864
(965,500)
(99,800)
6,090,651
1,889,696
5,982,663
(975,500)
(10,500)
6,902,202
1,889,744
6,730,825
(985,500)
(99,800)
7,550,538
1,889,792
7,491,086
(995,500)
(10,500)
8,389,593
Cash Flow Statement
2012
2013
2014
Cash flows from operating activities
Net earnings (loss)
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation & amortization
Stock compensation
Loss (gain) on sale of assets
Accreted interest on zero coupon subordinated notes
Cumulative earnings less than (in excess of) distributions from equity method investments
Change in assets and liabilities
Inventories
Prepaid expenses & other assets
Accounts payable
Accrued expenses & other liabilities
Net cash flows from operating activities
Cash flows from investing activities
Capital expenditures
Proceeds from sale of assets
Proceeds from sale of investments
Deferred payments on acquisitions
Acquistion of licensing technology
Investment in equity affiliates
Acquisition of business, net of cash acquired
Net cash flows from investing activities
Cash flows from financing activities
Proceeds from senior notes offerings
Proceeds from credit facilities
Payments on credit facilities
Payments on term loan
Payments on zero-coupon subordinated notes
Payments on vendor financed equipment
Payments on long term debt
Payment of debt issuance costs
Payments on long term lease obligations
Proceeds from sale of interest in a consolidated subsidiary
Cash paid to acquire an interest in a consolidated subsidiary
Minority interest distributions
Deferred payments on acquisitions
Excess tax benefits from stock based compensation
Net proceeds from issuance of stock to employees
Purchase of common stock
Net cash flows from financing activities
Effect of exchange rate changes on cash & cash equivalents
Net increase (decrease) in cash & cash equivalents
Cash & cash equivalents at beginning of year
Cash & cash equivalents at end of year
584,800
575,400
512,600
229,800
40,700
5,500
2,700
(400)
53,300
230,100
37,300
(3,900)
2,300
(4,200)
56,200
245,500
45,700
(12,500)
2,000
(5,800)
27,700
600
(6,300)
7,100
(30,000)
(46,400)
841,400
(67,500)
(15,300)
(32,300)
60,800
(20,200)
818,700
(31,100)
(300)
(12,900)
(21,200)
(10,700)
739,000
(173,800)
3,200
(2,900)
(2,500)
(26,000)
(332,200)
(534,200)
(202,200)
1,100
7,500
(6,500)
(159,500)
(359,600)
(203,500)
1,400
31,600
(20,200)
(159,400)
(350,100)
1,000,000
700,000
305,000
412,000
(865,000)
(412,000)
(8,200)
(21,500)
(350,000)
(8,900)
(9,300)
(400)
(1,200)
(900)
(5,600)
8,200
11,000
85,800
174,000
(516,500) (1,015,600)
(800)
(518,300)
(18,900)
(24,100)
(1,400)
(1,200)
(6,700)
5,900
114,800
(269,000)
(200,600)
1,100
307,500
159,300
466,800
(3,600)
(62,800)
466,800
404,000
(12,300)
176,000
404,000
580,000
Restated Cash Flow Statement
2015E
2016E
2017E
2018E
2019E
707,898
904,999
(316,381)
(48,449)
(172,299)
836,700
156,500
226,300
142,500
(42,600)
100,933
2,496,100
755,866
2,019,965
(49,004)
(8,124)
(14,276)
(36,324)
(7,338)
(211,500)
(142,500)
(20,295)
16,238
2,302,709
732,799
1,056,113
(34,906)
(5,795)
(10,169)
(35,363)
12,752
16,257
(6,434)
11,567
1,736,821
748,162
1,087,326
(23,875)
(3,964)
(6,955)
(34,427)
8,722
7,313
(4,401)
7,911
1,785,812
760,261
1,108,675
(18,802)
(3,121)
(5,477)
(33,516)
6,869
5,759
(3,466)
6,230
1,823,411
(1,950,299)
(2,169,000)
(3,037,200)
24,000
(7,132,499)
(1,244,278)
73,790
(686)
(1,171,174)
(1,087,326)
73,790
(693)
(1,014,229)
(1,108,675)
73,790
(700)
(1,035,585)
(1,125,488)
73,790
(707)
(1,052,404)
2,347,188
327,000
1,879,200
(642)
4,552,746
(938,498)
(150,831)
48
(619)
(1,089,900)
(747,135)
(67,234)
48
(10,000)
(596)
(824,917)
(531,797)
(35,782)
48
(10,000)
(575)
(578,105)
45,084
6,737
48
(10,000)
(554)
41,315
(102,325)
537,982
435,658
172,122
435,658
607,780
Operating activities
Net income (loss)
Depreciation & amortization
Change in accounts receivable
Change in inventories
Change in prepaid expenses
Change in deferred income taxes
Change in accounts payable
Accrued expenses and other current liabilities
Change in unearned revenues
Change in other assets
Change in other liabilities
Net cash from operating activities
Investing activities
Capital expenditures
Change in intangible assets
Payment in excess of business acquisitions
Net cash from investing activities
Financing activities
Proceeds from issuance of long term debt
Proceeds from issuance of short term debt
Proceeds from issuance of common stock
Repurchase of common stock
Change in noncontrolling interests
Net cash from financing activities
Change in cash
Plus beginning cash
Cash at end of year
(83,653)
580,000
496,347
41,635
496,347
537,982
812,322
607,780
1,420,101
Common Size Income Statement
2012
2013
2014
2015E
2016E
2017E
2018E
2019E
Net sales
100.00%
100.00%
100.00%
Cost of sales
60.33%
61.72%
63.35%
Gross profit
39.67%
38.28%
36.65%
Selling, general & administrative expenses 19.65%
19.43%
19.93%
Amortization of intangibles & other assets 1.52%
1.41%
1.28%
Restructuring & other special charges
0.45%
0.38%
0.30%
Operating income (loss)
18.05%
17.06%
15.14%
Other income (expenses)
Interest expense
1.67%
1.66%
1.82%
Equity method income, net
0.38%
0.29%
0.24%
Investment income (loss)
0.02%
0.04%
0.02%
Other income (expenses), net
-0.13%
0.04%
0.17%
Earnings before income taxes
16.65%
15.76%
13.75%
Provision for income taxes
6.34%
5.86%
5.22%
Net earnings (loss)
10.31%
9.91%
8.53%
Less: Net income attributable to noncontrolling
-0.03%
interest -0.03%
-0.02%
Net income attributable to Laboratory Corporation
10.28%of America
9.88%
Holdings 8.50%
100.00%
64.00%
36.00%
20.00%
0.85%
0.56%
14.58%
100.00%
64.00%
36.00%
20.00%
0.82%
0.56%
14.62%
100.00%
65.00%
35.00%
20.00%
0.79%
0.56%
13.64%
100.00%
65.00%
35.00%
20.00%
0.78%
0.56%
13.66%
100.00%
65.00%
35.00%
20.00%
0.77%
0.56%
13.67%
2.50%
0.26%
0.02%
-0.02%
12.34%
4.03%
8.31%
-0.12%
8.19%
2.25%
0.26%
0.02%
-0.02%
12.63%
4.13%
8.50%
-0.12%
8.38%
2.00%
0.26%
0.02%
-0.02%
11.90%
3.89%
8.01%
-0.12%
7.89%
2.00%
0.26%
0.02%
-0.02%
11.92%
3.90%
8.02%
-0.12%
7.90%
2.00%
0.26%
0.02%
-0.02%
11.93%
3.90%
8.03%
-0.12%
7.91%
Common Size Balance Sheet
2012
2013
2014
2015E
2016E
2017E
2018E
2019E
Cash & cash equivalents
8.23%
6.96%
9.65%
12.67%
13.51%
13.57%
Supplies inventories
2.13%
2.35%
2.32%
Prepaid expenses & other current assets 1.32%
1.84%
2.62%
0.19%
0.00%
0.00%
Total current assets
24.54%
24.66%
28.16%
Property, plant & equipment, gross
27.78%
29.82%
30.16%
Less accumulated depreciation & amortization
16.66%
of capital17.64%
lease assets17.08%
Property, plant & equipment, net
11.12%
12.18%
13.08%
Goodwill
51.16%
52.04%
51.56%
Intangibles assets, net
29.41%
27.06%
24.55%
Joint venture partnerships & equity method 1.38%
investments 1.52%
1.54%
Other assets, net
2.20%
2.46%
2.58%
Total assets
119.81%
119.93%
121.46%
5.74%
13.10%
2.17%
3.81%
0.38%
25.20%
43.53%
22.34%
10.43%
70.98%
42.16%
0.79%
2.28%
151.85%
5.96%
13.10%
2.17%
3.81%
0.00%
25.05%
55.52%
43.81%
11.71%
68.04%
39.59%
0.77%
2.41%
147.57%
4.69%
13.10%
2.17%
3.81%
0.00%
23.78%
65.64%
53.93%
11.71%
66.09%
37.66%
0.75%
2.41%
142.40%
6.42%
13.10%
2.17%
3.81%
0.00%
25.50%
76.08%
64.37%
11.71%
64.81%
36.16%
0.75%
2.41%
141.34%
14.77%
13.10%
2.17%
3.81%
0.00%
33.86%
86.66%
74.95%
11.71%
63.85%
34.85%
0.74%
2.41%
147.42%
4.70%
5.68%
0.09%
5.77%
16.24%
44.63%
8.82%
4.56%
74.25%
5.08%
6.57%
0.00%
7.80%
21.09%
58.18%
15.88%
4.34%
99.49%
4.78%
3.95%
0.00%
5.80%
14.53%
45.36%
14.82%
4.34%
79.05%
4.78%
4.01%
0.00%
4.91%
13.71%
36.01%
14.01%
4.34%
68.07%
4.78%
4.01%
0.00%
4.44%
13.23%
29.70%
13.38%
4.34%
60.65%
4.78%
4.01%
0.00%
4.44%
13.24%
29.73%
12.83%
4.34%
60.13%
Assets
Current assets
Liabilities and shareholders' equity
Current liabilities
Accounts payable
4.18%
5.24%
Accrued expenses & other current liabilities5.49%
5.34%
0.00%
0.17%
Total short-term borrowings & current portion
8.46%
of long-term1.92%
debt
Total current liabilities
18.13%
12.67%
Long-term debt, less current portion
38.35%
49.74%
Deferred income taxes & other tax liabilities9.63%
9.71%
Other liabilities
5.42%
4.59%
Total liabilities
71.53%
76.70%
Noncontrolling interest
0.36%
0.33%
0.29%
0.20%
0.18%
0.17%
0.16%
0.15%
Common stock
0.20%
Additional paid-in capital
0.00%
Retained earnings (accumulated deficit) 63.27%
Treasury stock, at cost
-16.78%
Accumulated other comprehensive earnings1.22%
(loss)
Total shareholders' equity
48.28%
0.18%
0.00%
58.08%
-16.51%
1.14%
43.23%
0.17%
0.00%
62.98%
-16.06%
-0.17%
47.21%
21.86%
0.00%
51.98%
-11.17%
-0.12%
62.75%
20.95%
0.00%
58.21%
-10.70%
-1.11%
67.53%
20.35%
0.00%
64.43%
-10.51%
-0.11%
74.33%
19.96%
0.00%
71.09%
-10.41%
-1.05%
79.75%
19.66%
0.00%
77.94%
-10.36%
-0.11%
87.29%
Weighted Average Cost of Capital (WACC) Estimation
Tax rate
Cost of equity
Risk free rate
+
Beta
*Market risk premium
Cost of equity
WACC
Cost of equity
*Equity/firm
+
Cost of debt
*(1-tax rate)
*Debt/firm
WACC
32.69%
7.04%
2.87%
0.86
4.85%
7.04%
7.04%
74.18%
5.17%
67.31%
25.82%
6.12%
30-Year Treasury Bond
Calculated based on data from Bloomberg (see inputs)
Henry Fund consensus estimate
Market value of equity:
$9,548,480
LH bond with maturity of 02/01/2045
Book value of debt:
$3,029,800 PV of Operating Leases:
$294,117
Value Driver Estimation
NOPLAT
EBITA
Revenue
Cost of goods sold
General and administrative expense
Amortization of non-goodwill intangibles
Implied interest on operating leases
EBITA
Adjusted taxes
Taxes (federal, state, and foreign)
Marginal tax rate
Total income tax provision
Tax shield on restructuring expense
Tax shield on interest expense
Tax on interest income
Tax on non-operating income
Tax shield on other non-operating income
Tax shield on implied operating lease interest
Total adjusted taxes
2012
5,671,400
3,421,700
1,114,600
86,300
26,821
1,161,921
2013
5,808,300
3,585,100
1,128,800
81,700
23,184
1,117,584
2014
6,011,600
3,808,500
1,198,200
76,700
16,947
1,021,847
2015E
2016E
2017E
2018E
2019E
8,645,026
5,532,817
1,729,005
73,790
15,215
1,398,419
9,019,241
5,772,314
1,803,848
73,790
13,659
1,456,738
9,285,798
6,035,769
1,857,160
73,790
12,263
1,405,132
9,468,120
6,154,278
1,893,624
73,790
11,009
1,431,227
9,611,701
6,247,606
1,922,340
73,790
9,883
1,451,638
306,100
32.42%
359,400
8,202
30,636
(6,938)
(324)
2,334
8,695
402,005
284,000
31.02%
340,200
6,762
29,932
(5,242)
(682)
(651)
7,191
377,510
286,400
34.64%
314,100
6,167
37,935
(4,954)
(381)
(3,603)
5,871
355,135
32.69%
348,814
15,924
70,659
(7,289)
(674)
660
4,974
433,068
32.69%
372,329
16,613
66,346
(7,604)
(703)
689
4,466
452,135
32.69%
361,277
17,104
60,717
(7,829)
(724)
709
4,009
435,263
32.69%
368,844
17,440
61,909
(7,983)
(738)
723
3,599
443,794
32.69%
374,803
17,704
62,848
(8,104)
(749)
734
3,231
450,468
43,300
27,800
(37,900)
836,700
(36,324)
(35,363)
(34,427)
(33,516)
1,161,921
402,005
43,300
803,215
1,117,584
377,510
27,800
767,874
1,021,847
355,135
(37,900)
628,813
1,398,419
433,068
836,700
1,802,051
1,456,738
452,135
(36,324)
968,279
1,405,132
435,263
(35,363)
934,506
1,431,227
443,794
(34,427)
953,006
1,451,638
450,468
(33,516)
967,655
366,588
718,500
121,000
74,600
1,280,688
375,437
784,700
136,500
106,900
1,403,537
388,578
815,700
139,500
157,500
1,501,278
496,347
1,132,081
187,949
329,799
2,146,176
537,982
1,181,085
196,072
344,075
2,259,215
435,658
1,215,992
201,867
354,244
2,207,760
607,780
1,239,867
205,831
361,199
2,414,677
621,281
1,258,669
208,952
366,677
2,455,579
Non interest-bearing current liabilities
236,900
311,600
548,500
304,500
310,000
614,500
282,300
341,400
623,700
438,800
567,700
1,006,500
431,462
356,200
787,662
444,214
372,457
816,671
452,936
379,770
832,706
459,805
385,529
845,334
Net property, plant, and equipment
630,800
707,400
786,500
901,498
1,056,113
1,087,326
1,108,675
1,125,488
1,667,700
124,900
518,474
2,311,074
1,572,000
143,100
448,175
2,163,275
1,475,800
154,800
327,612
1,958,212
3,644,800
197,400
294,117
4,136,317
3,571,010
217,695
264,047
4,052,752
3,497,220
224,129
237,051
3,958,399
3,423,430
228,529
212,814
3,864,774
3,349,640
231,995
191,056
3,772,691
307,400
307,400
266,500
266,500
274,200
274,200
375,133
375,133
391,371
391,371
402,938
402,938
410,849
410,849
417,080
417,080
Invested capital
Net operating working capital
Plus net property, plant, and equipment
Plus net other operating assets
Less net other operating liabilities
Invested capital
732,188
630,800
2,311,074
307,400
3,366,662
789,037
707,400
2,163,275
266,500
3,393,212
877,578
786,500
1,958,212
274,200
3,348,090
1,139,676
901,498
4,136,317
375,133
5,802,359
1,471,553
1,056,113
4,052,752
391,371
6,189,047
1,391,089
1,087,326
3,958,399
402,938
6,033,877
1,581,971
1,108,675
3,864,774
410,849
6,144,570
1,610,246
1,125,488
3,772,691
417,080
6,091,345
Return on invested capital
NOPLAT
/Beginning invested capital
Return on invested capital
803,215
2,875,844
27.93%
767,874
3,366,662
22.81%
628,813
3,393,212
18.53%
1,802,051
3,348,090
53.82%
968,279
5,802,359
16.69%
934,506
6,189,047
15.10%
953,006
6,033,877
15.79%
967,655
6,144,570
15.75%
Free cash flows
NOPLAT
Less ending invested capital
Plus beginning invested capital
Free cash flows
803,215
3,366,662
2,875,844
312,397
767,874
3,393,212
3,366,662
741,325
628,813
3,348,090
3,393,212
673,935
1,802,051
5,802,359
3,348,090
(652,218)
968,279
6,189,047
5,802,359
581,591
934,506
6,033,877
6,189,047
1,089,676
953,006
6,144,570
6,033,877
842,312
967,655
6,091,345
6,144,570
1,020,880
Economic profit
Beginning invested capital
ROIC
WACC
Economic profit
2,875,844
27.93%
6.12%
627,158
3,366,662
22.81%
6.12%
561,770
3,393,212
18.53%
6.12%
421,083
3,348,090
53.82%
6.12%
1,597,083
5,802,359
16.69%
6.12%
613,062
6,189,047
15.10%
6.12%
555,617
6,033,877
15.79%
6.12%
583,616
6,144,570
15.75%
6.12%
591,488
Change in deferred taxes
EBITA
Less adjusted taxes
Plus change in deferred taxes
NOPLAT
Invested Capital
Net operating working capital
Operating current assets
Normal cash
Receivables
Inventory
Pre-paid expenses and other current assets
Operating current assets
Non interest-bearing current liabilities
Accounts payable
Accrued expenses & other current liabilities
Net other operating assets
Net intangible assets
Other assets
PV of operating leases
Net other operating assets
Net other operating liabilities
Other liabilities
Net other operating liabilities
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity
1.52%
15.75%
6.12%
7.04%
DCF Model
Period
Free cash flow
CV
PV of free cash flows
PV of CV
Operations value
2016E
2017E
2018E
2019E
1
(652,218)
2
581,591
3
1,089,676
4
842,312
4
(614,593)
516,425
911,763
664,129
18,987,753
14,971,075
16,448,799
Non-operating assets:
Excess cash
Value of non-operating assets
Non-operating liabilities:
PV of employee stock options
Short-term debt
Long-term debt
Value of non-operating liabilities
2015E
0
68,600
68,600
294,117
153
674,100
5,029,888
5,998,258
Equity value
Shares outstanding
Price at YE FY2014
10,519,141
84,800
$ 124.05
Price today
$
EP Model
Period
Economic profit
Continuing value
PV of economic profit
PV of continuing value
Initial invested capital
Operations value
1
1,597,083
2
613,062
3
555,617
4
583,616
1,504,951
544,370
464,901
460,157
Equity value
Shares outstanding
Price at YE FY2014
Price today
4
12,843,183
10,126,330
3,348,090
16,448,799
Non-operating assets:
Excess cash
Value of non-operating assets
Non-operating liabilities:
PV of employee stock options
Short-term debt
Long-term debt
Value of non-operating liabilities
131.03
0
68,600
68,600
294,117
153
674,100
5,029,888
5,998,258
10,519,141
84,800
$ 124.05
$
131.03
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
2015E
2016E
2017E
2018E
2019E
Period
EPS
1
$7.05
2
$7.53
3
$7.31
4
$7.47
4
$7.59
Key Assumptions
CV growth
CV ROE
Cost of Equity
Payout ratio
1.52%
9.06%
7.04%
0.00%
43.81%
13.05%
-$16.63
4.33%
12.41%
$4.90
2.96%
10.62%
$5.27
1.96%
9.91%
$5.99
1.52%
9.06%
$9.12
-$15.53
$4.28
$4.30
$4.56
$125.72
Future Cash Flows
Growth
ROE
Dividends Per Share
Discounted Cash Flows
Intrinsic Value
$123.33
Price today
$130.28
Relative Valuation Models
Ticker
PRXL
Q
ICLR
CRL
DGX
Company
PAREXEL International Corporation
Quintiles Transnational Holdings, Inc.
ICON Plc
Charles River Laboratories International, Inc.
Quest Diagnostics Incorporated
LH
Implied Value:
Relative P/E (EPS15)
Relative P/E (EPS16)
Price
$61.39
$70.03
$70.80
$65.82
$63.25
$112.60
$
$
EPS
2015E
$2.97
$2.96
$3.94
$3.34
$3.89
EPS
2016E
$3.85
$3.65
$4.68
$3.68
$4.84
Average
P/E 15
20.7
23.7
18.0
19.7
16.3
19.7
P/E 16
15.9
19.2
15.1
17.9
13.1
16.2
$7.05
$7.53
16.0
14.9
138.64
122.34
Key Management Ratios
2010
2011
2012
2013
2014
2015E
2016E
2017E
2018E
2019E
Liquidity Ratios
Current (Current Assets/Current Liabilities)
Quick (Current Assets-Inv)/Current Liabilities
Operating Cash Flow (Operating Cash Flow/Current Liabilities)
1.18
1.07
0.91
1.36
1.22
1.07
1.35
1.24
0.82
1.95
1.76
1.11
1.73
1.59
0.76
1.20
1.09
1.37
1.72
1.57
1.76
1.73
1.58
1.36
1.93
1.76
1.43
2.56
2.39
1.43
7.63
28.11
0.81
8.18
30.51
0.90
8.00
29.52
0.83
7.73
27.85
0.83
7.51
27.60
0.82
8.24
32.58
0.66
7.80
30.06
0.68
7.75
30.34
0.70
7.71
30.19
0.71
7.69
30.12
0.68
1.43
0.40
2.49
1.43
0.41
2.43
1.48
0.40
2.48
1.77
0.36
2.77
1.57
0.39
2.57
1.59
0.41
2.42
1.17
0.46
2.19
0.92
0.52
1.92
0.76
0.56
1.77
0.69
0.59
1.69
9.02%
22.45%
19.56%
41.92%
8.47%
20.59%
17.11%
41.04%
8.58%
21.30%
18.05%
39.67%
8.24%
22.85%
17.06%
38.28%
7.00%
18.01%
15.14%
36.65%
5.39%
13.05%
14.58%
36.00%
5.68%
12.41%
14.62%
36.00%
5.54%
10.62%
13.64%
35.00%
5.59%
9.91%
13.66%
35.00%
5.37%
9.06%
13.67%
35.00%
Activity or Asset-Management Ratios
Receivables turnover (sales/average receivables)
Inventory turnover ratio (COGS/average inventory)
Asset turnover ratio (sales/total assets)
Financial Leverage Ratios
Debt to equity ratio (total liabilities/shareholder equity)
Equity ratio (shareholder equity/total assets)
Leverage (assets/equity)
Profitability Ratios
Return on assets (net income/total assets)
Return on equity (net income/shareholders equity)
Operating margin (operating income/sales)
Gross profit margin (gross profit/revenue)
Current price:
$112.60
Cost of sales % of
sales (2019)
$131.03
63.00%
64.00%
65.00%
66.00%
67.00%
5.72%
182.96
167.61
152.27
136.92
121.57
5.92%
170.30
155.76
141.22
126.68
112.14
$131.03
18.00%
19.00%
20.00%
21.00%
22.00%
0.46
270.40
249.52
228.63
207.75
186.87
0.66
204.26
187.58
170.90
154.22
137.54
$131.03
1.17%
3.17%
5.17%
6.17%
7.17%
11.75%
161.43
141.26
124.27
116.78
109.80
$131.03
-3.50%
-2.50%
-1.50%
-0.50%
0.50%
$131.03
1.00%
3.00%
5.00%
7.00%
9.00%
WACC
6.12%
158.63
144.83
131.03
117.24
103.44
6.32%
148.14
135.01
121.88
108.75
95.62
6.52%
138.40
125.89
113.38
100.87
88.36
0.86
158.63
144.83
131.03
117.24
103.44
1.06
125.19
113.49
101.79
90.09
78.39
1.26
99.58
89.48
79.37
69.26
59.16
13.75%
166.10
145.51
128.15
120.49
113.37
CV ROIC
15.75%
169.59
148.67
131.03
123.26
116.02
17.75%
172.29
151.12
133.28
125.40
118.08
19.75%
174.45
153.07
135.06
127.12
119.72
-0.52%
92.09
92.23
92.36
92.57
92.81
0.52%
108.24
108.42
108.60
108.86
109.17
CV Growth
1.52%
130.56
130.80
131.03
131.38
131.78
2.52%
165.51
165.84
166.18
166.65
167.19
3.52%
227.16
227.66
228.17
228.86
229.64
4.17%
138.16
138.81
139.46
140.53
141.83
4.67%
133.94
134.56
135.17
136.21
137.48
Cost of debt
5.17%
129.86
130.45
131.03
132.04
133.28
5.67%
125.98
126.54
127.10
128.07
129.28
6.17%
122.23
122.76
123.29
124.23
125.41
Beta
SG&A % of sales
(2019)
Cost of Debt
Covance sales
growth (2015)
Core testing sales
growth (2015)

Laboratory Corporation of America Holdings (LH)

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