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LabCorp Trades at Discounted PE Multiples Compared with Peers in 1Q16

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May. 2 2016, Updated 2:06 p.m. ET

PE multiples

On April 26, 2016, Laboratory Corporation of America (LH) was trading at a forward PE (price-to-earnings) multiple of about 12.8x. Since January 1, 2016, LabCorp has traded at a PE multiple in the range of 11.1x–12.8x.

Since November 2015, LabCorp has traded at PE multiples lower than those of its peers, including Davita Healthcare (DVA), Quest Diagnostic (DGX), and Idexx Laboratories (IDXX). Although the company is supported by strong business fundamentals and cost structure, it has been facing the negative impact of currency fluctuations in 2016.

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The government’s role

The increasing focus of the US government on controlling healthcare costs has resulted in steep reimbursement cuts for the company since 2013. On September 25, 2015, the Centers for Medicare and Medicaid Services (or CMS) proposed a rule that requires laboratories to report the reimbursement rates they charge to private health insurers.

Effective January 1, 2017, CMS plans to set the agency’s reimbursement rates in line with those of private insurers. In 2011, the Department of Health and Human Services noted that Medicare payment rates to laboratories for certain tests surpassed those of private insurers by about 18%–20%. With Medicare and Medicaid making up about 11% of LabCorp’s total revenues, future pricing cuts by CMS may affect the company’s profit margins.

Investor sentiments are also affected by unfavorable regulatory changes, which further results in downward pressure on the company’s share price and valuations. This may also adversely affect share prices of the iShares US Healthcare Providers ETF (IHF). LabCorp makes up about 3.3% of IHF’s total portfolio holdings.

Analyst recommendations

In a Bloomberg survey of 22 brokerage companies on April 26, 2016, about 71.4% of the brokers rated LabCorp (LH) a “buy,” while 28.6% rated it a “hold.” None of the brokers rated it a “sell.”

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