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Medical Stocks

Laboratory Corporation of America Holdings Annual Valuation – 2015 $LH

500px-LabCorp.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – April 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Laboratory Corporation of America Holdings (LH) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Laboratory Corporation of America Holdings is a clinical laboratory company. Through a network of laboratories, the Company offers a range of clinical laboratory tests that are used by the medical profession in core testing and patient diagnosis, and in the monitoring and treatment of disease. The Company has also developed testing operations, such as oncology testing, HIV genotyping and phenotyping, diagnostic genetics, cardiovascular disease risk assessment, HCV diagnosis and monitoring, and clinical trials. The Company has a national network of 44 primary laboratories and 1,700 patient service centers (PSCs) along with a network of branches and STAT laboratories (which are laboratories that have the ability to perform certain core tests and report the results to the physician quickly). Its clients include physicians, hospitals, managed care organizations, governmental agencies, employers, pharmaceutical companies and other independent clinical laboratories.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - PASS
  4. Dividend Record – currently pays a dividend - FAIL
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $116.56
MG Value $117.25
MG Opinion Fairly Valued
Value Based on 3% Growth $94.18
Value Based on 0% Growth $55.21
Market Implied Growth Rate 4.72%
Net Current Asset Value (NCAV) -$77.87
PEmg 17.95
Current Ratio 1.65
PB Ratio 2.42

Balance Sheet – March 2015

Current Assets $2,329,000,000
Current Liabilities $1,412,000,000
Total Debt $6,598,000,000
Total Assets $14,151,000,000
Intangible Assets $9,886,000,000
Total Liabilities $9,633,000,000
Outstanding Shares 93,800,000

Earnings Per Share

2015 (estimate) $7.59
2014 $5.91
2013 $6.25
2012 $5.99
2011 $5.11
2010 $5.29
2009 $4.98
2008 $4.16
2007 $3.93
2006 $3.24
2005 $2.71

Earnings Per Share – ModernGraham

2015 (estimate) $6.50
2014 $5.87
2013 $5.74
2012 $5.36
2011 $4.93
2010 $4.66

Dividend History
Laboratory Corporation of America does not pay a dividend.

Conclusion:

Laboratory Corporation of America Holdings is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, and the insufficient lack of dividends.  The Enterprising Investor is concerned with the level of debt relative to the current assets and the lack of dividends.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $4.93 in 2011 to an estimated $6.50 for 2015.  This level of growth supports the market’s implied estimate of 4.72% annual growth over the next 7-10 years, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Laboratory Corporation of America Holdings (LH)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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