Plasma Detect Launch And Invitae Acquisitions Will Expand Oncology Genetic Testing By 2025

Key Takeaways

• Strategic acquisitions and collaborations are driving revenue growth and improving margins through enhanced offerings in genetic testing and oncology diagnostics.
  
• Investments in operational efficiencies and expanding Biopharma services aim to boost organic revenue growth and adjust EPS in the long term.
  
• Strategic acquisitions and external factors, such as weather disruptions and regulatory changes, pose risks to Labcorp's revenue stability, margins, and future financial performance.

Catalysts

Provides laboratory services.

• The acquisition of select assets of Invitae is expected to contribute significantly to revenue growth through enhanced offerings in genetic testing and personalized treatment recommendations, especially in oncology and rare diseases, improving both enterprise margins and adjusted EPS by the end of 2025.
  
• The launch of Plasma Detect in U.S. clinical use in 2025, backed by 12 global trials, positions Labcorp well for revenue growth in oncology diagnostics, particularly with increased market share in MRD detection, positively impacting future enterprise margins.
  
• Strategic acquisitions and collaborations with healthcare systems like Lab Works and Inspira Health are expected to expand Labcorp's market reach, bolstering diagnostic revenue and supporting margin improvements by operational synergies in regional health systems.
  
• The LaunchPad initiative and ongoing acquisitions support anticipated cost savings and operational efficiencies, projected to improve net margins and free cash flow in line with the assumptions for sustained earnings growth in Labcorp's 2025 outlook.
  
• Investments in and expansion of Central Labs and Early Development in the Biopharma Laboratory Services segment, ensured by a robust backlog and strong demand, aim to drive mid-single-digit organic revenue growth, enhancing segment margins and contributing to overall adjusted EPS growth.

Labcorp Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Labcorp Holdings's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 8.0% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $15.64) by about March 2028, up from $746.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.8x on those 2028 earnings, down from 26.9x today. This future PE is lower than the current PE for the US Healthcare industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.37%, as per the Simply Wall St company report.

Labcorp Holdings Future Earnings Per Share Growth

Risks

• The spin-off of Fortrea Holdings, Inc. could result in disruptions or distractions that might impact Labcorp's operating and financial results, affecting revenue stability and earnings.
  
• The recent acquisition of Invitae and other strategic mergers could dilute margins in the short term, as seen with the 40 basis point decline due to the Invitae acquisition, potentially impacting net margins and earnings.
  
• The diagnostics segment saw enterprise margins decline this quarter and there is uncertainty on how quickly they can offset acquisition-related dilutions, which could affect net margins.
  
• Concerns over weather disruptions, which have been accounted for as a $0.10 impact in January, illustrate vulnerability to external factors impacting forecasting and immediate net earnings.
  
• Potential regulatory changes around lab-developed tests (LDTs) and PAMA may introduce uncertainty and potential new costs or reimbursement challenges, impacting future revenue stability and operational costs.

Valuation

• The analysts have a consensus price target of $273.595 for Labcorp Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $300.0, and the most bearish reporting a price target of just $232.12.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $15.3 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 6.4%.
• Given the current share price of $239.68, the analyst price target of $273.6 is 12.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.