Laboratory Corp of America Holdings Valuation – July 2016 $LH

Benjamin 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 10 Companies Benjamin Graham Would Invest In Today - June 2016.  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 stock analysis showing a specific look at how Laboratory Corp of America Holdings (LH) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Laboratory Corporation of America Holdings is a healthcare diagnostics company. The Company, together with its subsidiaries, is engaged in providing clinical laboratory services and drug development support. The Company operates through two segments: LabCorp Diagnostics (LCD) and Covance Drug Development (CDD). The Company’s LCD segment is an independent clinical laboratory business that consists of a network of approximately 40 primary laboratories and approximately 1,700 patient service centers (PSCs) along with a network of branches and STAT laboratories, which offer a menu of routine and frequently ordered tests. LCD offers a menu of over 4,700 tests, such as blood chemistry analyses, urinalyses, blood cell counts and thyroid tests. Its CDD segment offers drug development services, and provides a range of drug development solutions across the world, primarily to companies in the pharmaceutical and biotechnology industries.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of LH- July 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $13,977,779,726 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.67 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 45.14% Pass
6. Moderate PEmg Ratio PEmg < 20 21.03 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.73 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.67 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 5.42 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

LH value chart July 2016

EPSmg $6.48
MG Growth Estimate 3.14%
MG Value $95.69
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $93.94
MG Value based on 0% Growth $55.07
Market Implied Growth Rate 6.27%
Current Price $136.25
% of Intrinsic Value 142.38%

Laboratory Corp. of America Holdings does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $5.36 in 2012 to an estimated $6.48 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 6.27% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Laboratory Corp. of America Holdings scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

LH charts July 2016

Net Current Asset Value (NCAV) -$62.73
Graham Number $99.64
PEmg 21.03
Current Ratio 1.67
PB Ratio 2.73
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0


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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $2,744,900,000
Total Current Liabilities $1,642,700,000
Long-Term Debt $5,969,500,000
Total Assets $14,410,400,000
Intangible Assets $9,662,800,000
Total Liabilities $9,243,900,000
Shares Outstanding (Diluted Average) 103,600,000

Earnings Per Share History

Next Fiscal Year Estimate $8.72
Dec2015 $4.34
Dec2014 $5.91
Dec2013 $6.25
Dec2012 $5.99
Dec2011 $5.11
Dec2010 $5.29
Dec2009 $4.98
Dec2008 $4.16
Dec2007 $3.93
Dec2006 $3.24
Dec2005 $2.71
Dec2004 $2.45
Dec2003 $2.22
Dec2002 $1.77
Dec2001 $1.27
Dec2000 $0.81
Dec1999 $0.30
Dec1998 $0.50
Dec1997 -$2.65
Dec1996 -$3.13

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $6.48
Dec2015 $5.41
Dec2014 $5.87
Dec2013 $5.74
Dec2012 $5.36
Dec2011 $4.93
Dec2010 $4.66
Dec2009 $4.17
Dec2008 $3.61
Dec2007 $3.19
Dec2006 $2.71
Dec2005 $2.32
Dec2004 $1.99
Dec2003 $1.59
Dec2002 $1.16
Dec2001 $0.59
Dec2000 -$0.11

Recommended Reading:

Other ModernGraham posts about the company

47 Companies in the Spotlight This Week – 5/16/15
Laboratory Corporation of America Holdings Annual Valuation – 2015 $LH
15 Companies in the Spotlight This Week – 5/3/2014
Laboratory Corporation of America (LH) Annual Valuation – 2014

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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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.






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