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3 Reasons LH is Risky and 1 Stock to Buy Instead

LH Cover Image

Labcorp trades at $269.31 and has moved in lockstep with the market. Its shares have returned 10% over the last six months while the S&P 500 has gained 5.4%.

Is there a buying opportunity in Labcorp, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Labcorp Not Exciting?

We're sitting this one out for now. Here are three reasons why LH doesn't excite us and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

Investors interested in Testing & Diagnostics Services companies should track organic revenue in addition to reported revenue. This metric gives visibility into Labcorp’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Labcorp’s organic revenue averaged 3.5% year-on-year growth. This performance slightly lagged the sector and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. Labcorp Organic Revenue Growth

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.

Analyzing the trend in its profitability, Labcorp’s adjusted operating margin decreased by 14.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 13.8%.

Labcorp Trailing 12-Month Operating Margin (Non-GAAP)

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Labcorp’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Labcorp Trailing 12-Month Return On Invested Capital

Final Judgment

Labcorp isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 16× forward P/E (or $269.31 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward the most dominant software business in the world.

Stocks We Would Buy Instead of Labcorp

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