Obamacare could propel this stock to a 70% gain

With the Affordable Care Act bringing millions more patients into the system, Lab Corp should have all the business it can handle for years to come.

By StreetAuthority Jan 29, 2014 10:27AM
Image: Medical doctor (© Digital Vision/Getty Images)By Tim Begany

It's no secret that Americans are pretty voracious consumers of health care.

Health care accounts for more than 17 percent of GDP, and the sector is projected to grow to 20 percent of the U.S. economy within eight years. A good chunk of the sector is diagnostic laboratory testing, now about a $60 billion industry in the U.S.

Currently, hospitals and health care networks do most lab tests, ranging from routine blood and urine screens to more time-consuming, complex cancer and genetic tests. However, health care providers are now much more likely to outsource lab tests, particularly the more complicated ones, because it's often cheaper and more efficient.

Typically, health care providers want a large, reputable lab with many accessible locations. They certainly prefer a lab that can handle volume that is likely to grow substantially, thanks to the Affordable Care Act (aka Obamacare).

Obamacare, which emphasizes preventive testing, is expected to bring an estimated 25 million new patients into the health care system during the next 10 years. What's more, the enormous baby boomer population will likely need all sorts of diagnostic tests as they age. (My colleague Joseph Hogue explored this trend in his "Graying of America" series last summer.)

These trends hold plenty of profit potential, and one particular company I think is in the best position to capitalize. As you might expect, it's an industry leader, currently generating $5.8 billion of annual revenue and earnings per share (EPS) of $6.07.

I especially like this company's growth strategy of increasing its offerings of more complex diagnostic tests that health care providers are likely to outsource. Such tests are typically more profitable because they're reimbursed at higher rates than routine tests.

This company also plans to grow through acquisitions and joint ventures and by continually investing in software that helps improve customer loyalty. It has been implementing innovative cost-cutting measures, too.

I'm referring to Laboratory Corporation of America (LH), which operates 1,800 lab test centers and holds about 20 percent of the independent lab test market.

Among LabCorp's latest offerings of the more complex and profitable variety is a new FDA-approved breast cancer test that helps predict the likelihood of recurrence years down the road in postmenopausal women treated for breast cancer. Clinical studies have found the new test more accurate and informative than previous tests designed for the same purpose.

One of LabCorp's newest genetic tests is the chromosome SNP microarray, which can be used to detect chromosomal changes associated with autism and other developmental problems in children. LabCorp also recently announced the nationwide availability of its KRAS mutation test doctors for identifying patients with colorectal cancer who would benefit from a particular form of treatment. The company has also recently launched non-routine diagnostic tests for use in a variety of other areas such as diabetes, HIV and reproductive issues. In all, LabCorp has about 4,000 routine and more complex diagnostic tests.

While LabCorp creates many of its own tests, acquisitions have yielded others. In June 2012, for example, the company bought Medtox Scientific, a maker of specialized tests for employment drug screening, forensics and pharmaceutical clinical trials. A year earlier, Clearstone Central Laboratories was acquired for its expertise with lab tests that evaluate medications in the late stages of development. Management recently inked a multi-year deal with genetic research firm Illumina (ILMN) to use Illumina products to develop new lab tests.

To foster customer loyalty, LabCorp provides online interfaces for managing lab test information. One of the newest is LabCorp Beacon, a Web-based system for ordering tests, viewing and sharing results, and analyzing trends in the results. Test Menu, another online tool, is a searchable directory of all LabCorp tests.

To help boost the bottom line, the company has been trying to reduce its paid workforce by increasing automation. Last September, for instance, the company completed an automation project at its Burlington, N.C., center, where robots now do the repetitive test sample splitting and sorting previously done by people. Management has set a goal of completely automating these functions in its Atlantic division by the end of July.

Another boon to profitability is that LabCorp minimizes less profitable managed-care contracts in which the amount that can be charged for lab tests is capped. Guarantees of higher business volume can make such contracts tempting, but LabCorp hasn't allowed itself to fall into this trap and has limited capped managed-care contracts to around 3 percent to 4 percent of total revenue for many years.

Risks to consider: About 15 percent of revenue is from lab tests paid for by Medicare, meaning LabCorp has substantial vulnerability to pricing pressure from the government. Also, greater proliferation of high-deductible health plans could hinder lab test demand by placing more of the cost burden directly on patients, who may then sometimes opt to skip recommended tests.

Action to take:
Based on the trends and LabCorp's leading position in its industry, I think the company stands to generate some nice profits in coming years. Indeed, EPS should climb an average of 10 percent a year, hitting $9.78 in five years. Assuming a price-to-earnings (P/E) ratio in the stock's historical range of 16, the stock price could reach $156 per share in 2019, which would be good for a 71 percent gain from the current price of around $91. With a current P/E of 15, LabCorp is a good value -- and a smart buy -- right now.

Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

More from StreetAuthority

Jan 29, 2014 12:23PM

 i wonder if obamas family and friends are invested in this stock?


govt is picking winners and losers.


this administration is corrupt

Jan 29, 2014 10:57AM
There's one problem with this premise - Labcorp might have all the business they can handle, but will they get paid for it?  Obamacare will be perpetually underfunded, and the margins are going to get squeezed on the providers. 

Q:  What's worse than being a healthcare provider under Obamacare? 
A:   Being a vendor to a healthcare provider under Obamacare....
Jan 29, 2014 11:57AM

So,  The truth comes out. Obama Care  IS about Profits.   Don't you Obama worshipers just hate that?  As  the prior commenter stated,  getting the work  and getting paid for it are two different things.   Don't sell your  gold to buy the stock just yet.      Obama's SOTU address was so generic as to be meaningless.  He had the  audacity to mention that  gas and oil production is up, yet he knows he had absolutely nothing to do with that.  It is up despite  his  hatred of the these energy producers.   If he wanted to increase jobs and energy he should have stated that  he will allow the XL pipeline to be built and open up federal lands for more oil and gas production, transportation and refining.


Feb 2, 2014 4:35AM
I think more people will opt to pay the fine for not having insurance. The ACA is a joke. 
Jan 29, 2014 11:16AM
I did my best to be a good citizen and listen in to the SOTU but alas seeing all the self serving pirates applauding nothing and the monotony of the propoganda sent me to slumber land.  The best conclusion is nothing will change and none of the meaty issues were touched upon.  But I guess in that I was unable to continue drinking the Kool Aide I should really have no opionion.  In the meantime the VIX is up ten percent which usually means these losses will last throughout the day.  Ho Hum
Feb 2, 2014 4:34AM
 Obamacare  serves only to enrich insurance companies and the medical profession at the risk of your health. Like everything else in Washington. it is soly designed to absorb wealth from the population.
Jan 29, 2014 12:20PM

The "whole" Medical World, Hospitals, Doctors, Big Pharma, Healthcare and Long Term Care...

"IS ABOUTS PROFITS"...Has BEEN for about at least 30-40 years...

HOW OLD ARE YOU..........??

Feb 2, 2014 10:08AM
The company that prints all of the food stamp booklets for Obamaville loves Obamacare, too.
Jan 29, 2014 12:53PM
Feb 2, 2014 10:03AM

Glad to see somebody will benefit.  Remember Congress voted Obamacare in without

readying a word of what was in the bill so all the credit goes to the President and Nancy

Pelosi for what ever happens to the "Affordable Care Act"  .  . 

Jan 29, 2014 2:27PM
Re-TOG           SCARED___ NOT

Feb 2, 2014 9:28AM
If you are a healthcare provider you all ready understand that under Obama care, it's going to be a struggle to keep your doors open. 

And companies like this one will struggle right long with them............be cautious.      
Feb 2, 2014 8:54AM
Put your money in Consolidated Caskets,..
Jan 29, 2014 1:44PM
Well, they didn't wait long, at about 1215 hrs the call came and back down we go....About 150 and counting....Folks, this has nothing to do with news or earnings or China or anything of that sort...This is just manipulators in charge doing their thing...Oh well, and it may get worse after the Fed this afternoon....It usually does.
Feb 2, 2014 10:19AM
I am sure this is not the only one and my question is how many congressmen are taking their share of the funds.... can't trust anyone these days included our POTUS 
Feb 2, 2014 2:22PM
Seems like anything that financially hurts the majority of the American civilian  public makes the NYSE soar. Kinda funny in a ways isn't it?
Feb 2, 2014 9:17AM
This make a lot of sense ,the Health care industry is growing we are living longer, always in need of test.Sound like a winner.Good day
Yes, and Solyndra loves handout, surprise!
Feb 2, 2014 9:46PM
I'm praying for America.  Although we don't have a president who cares we certainly have a God who cares!!
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