Laboratory Corporation of America Holdings (LH Quick QuoteLH - Free Report) or LabCorp has been gaining from strength in its Covance Drug Development business. The company ended the fourth quarter of 2021 with better-than-expected results. The company’s acquisitions of Ovia Health and Personal Genome Diagnostics to strengthen its position in high-growth opportunity areas buoy optimism. However, tough competition and forex woes raise apprehensions.

Over the past year, the Zacks Rank #3 (Hold) stock has gained 12.1% against the 5.6% increase of the industry and the 8.1% rise of the S&P 500.

The renowned healthcare diagnostics company has a market capitalization of $24.87 billion.

Over the past five years, the company’s earnings grew 26.1%, ahead of the industry’s 12.8% growth and the S&P 500’s 2.8% rise. The company’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 21.6% on average.

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Let’s delve deeper.

Factors At Play

Q4 Upsides: LabCorp exited the fourth quarter of 2021 with better-than-expected earnings and revenues. During the quarter, the Covance Drug Development business delivered higher sales on strong base business growth. Within Diagnostics, base business organic volume increased on solid year-over-year growth in esoteric and routine procedures. In terms of COVID-19 response, LabCorp experienced greater-than-anticipated COVID-19 testing volumes. The company conducted nearly 8.6 million COVID-19 tests in the reported quarter.

Targeted Development in High-Growth Area: We are upbeat about LabCorp’s consistent efforts to identify and expand in high-growth opportunity areas. In August 2021, LabCorp acquired Ovia Health to strengthen its foothold in women’s health. In Oncology, another high-growth area, LabCorp signed a definitive agreement to acquire Personal Genome Diagnostics Inc. (PGDx) in December 2021. Other notable offerings in the company’s oncology test menu include the OmniSeq INSIGHT and the clonoSEQ. Further, during the fourth quarter, LabCorp opened an integrated laboratory in Singapore, which has strengthened its bioanalytical services in the Asia-Pacific region.

Covance Drug Development Growth Continues: This business is benefiting from collaborations with leading pharmaceutical and biotechnology companies with whom it started to work on potential antivirals, treatments and vaccines. In the fourth quarter, within this business, revenues improved 3.9% year over year on an organic base-business growth of 7.9% and acquisitions growth of 0.3%. In terms of new acquisitions, LabCorp completed its buyout of Toxikon Corporation in December 2021. The addition of Toxikon to the Drug Development business is anticipated to strengthen the company’s strong nonclinical development portfolio as well as help it develop a strategic footprint to work with pharmaceutical and biotechnology clients in Boston, MA.

Downsides

Dull Sales Scenario: LabCorp’s fourth-quarter 2021 revenues fell 9.7% on a year-over-year basis. The decline in revenues can be attributed to 10.3% fall in organic revenues and 0.1% fall from divestitures. Further, lower contributions from COVID-19 testing significantly impacted diagnostics revenues in the quarter.

Exposed to Currency Headwind: With LabCorp deriving a huge share of its revenues from international operations, it remains highly exposed to currency fluctuations. Unfavorable currency movements have been a major dampener over the last few quarters, as in the case of other important MedTech players.

Competitive Landscape: LabCorp faces intense competition from renowned MedTech companies, as well as from other commercial laboratories and hospitals. In the $55-billion U.S. lab market, hospitals control an estimated 55% of the diagnostic test market, compared to LabCorp’s 10% share. LabCorp and other commercial labs compete with hospital-affiliated labs primarily on the basis of quality of service.

Estimate Trend

Over the past 90 days, the Zacks Consensus Estimate for LabCorp’s 2022 earnings has moved north by 13.7% to $19.54.

The Zacks Consensus Estimate for its 2022 revenues is pegged at $15.04 billion, suggesting 4.5% decline from the 2021 comparable figure.

Key Picks

A few stocks in the broader medical space that investors can consider are Henry Schein, Inc. (HSIC Quick QuoteHSIC - Free Report) , Owens & Minor, Inc. (OMI Quick QuoteOMI - Free Report) and AmerisourceBergen Corporation .

Henry Schein has an estimated long-term growth rate of 11.8%. Henry Schein’s earnings surpassed estimates in the trailing four quarters, the average surprise being 25.5%. It carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Henry Schein has outperformed the industry over the past year. HSIC has gained 29.7% compared with the industry’s 5.7% rise over the past year.

Owens & Minor has a long-term earnings growth rate of 23.6%. Owens & Minor’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 29.5%, on average. It carries a Zacks Rank #2.

Owens & Minor has outperformed the industry over the past year. OMI has gained 11.8% against a 18.2% industry decline in the said period.

AmerisourceBergen has a long-term earnings growth rate of 8.2%. In the trailing four quarters, AmerisourceBergen’s earnings surpassed estimates in three and missed in one, delivering an average surprise of 2.3%. The stock currently sports a Zacks Rank #2.

AmerisourceBergen has outperformed its industry in the past year, gaining 33.1% versus the industry’s 5.7% rise.