Laboratory Corp. of America Holdings (NYSE:LH) announced on November 3, 2014 that it has entered into a stock and cash agreement with Covance Inc. (NYSE:CVD) totaling up to about $6.1 Billion.  Laboratory Corp specializes in testing services such as patient monitoring, diagnosis, treatment, etc.  Covance focuses on lab testing and drug development for industries such as chemical, agrochemical and food.

Laboratory Corp

Laboratory Corp. sales increase but EPS decrease

Health care stocks, in general, have been some of the top performing stocks since the recovery began.  The health care sector is up 11.27% year to date, but the medical devices industry has overall lagged the performance of the overall sector, up 7.56% year to date.  Being that Laboratory Corp resides in the medical device industry, the company has experienced some spotty earnings.  Laboratory Corp. of America Holdings (NYSE:LH)  faces sales, quarter over quarter, increase of 6.10%, but earnings per share has fallen -2.50% during the same period. Earnings are forecasted to rise 4.30% this year, 8% next year and over 9% over the next five years.  Being that earnings growth is not all that impressive, LabCorp took to acquisitions in search of new revenue sources, such as Covance Inc. (NYSE:CVD)’s lab testing contract business.

Covance has a few earnings issues themselves with sales, quarter over quarter, up 6.70% and earnings per share falling -59.70% during the same period.  Earnings are forecasted to climb 87.50% this year, over 14% next year and nearly 14.50% over the next five years.  While the company did just recently report decent earnings of $1.16 per share on revenue of $671 million, management lowered top end full year guidance from $3.92 per share to a range of $3.78-$3.81 per share.

Laboratory Corp CEO will keep holding the reins of the company

The new larger corporation will see a new revenue breakdown: 32% from managed care, 29% from pharmaceutical and biotech companies, 22% from commercial clients, 12% from Medicare/Medicaid, and 5% from private clients.  Additionally, it is said that current Laboratory Corp. of America Holdings (NYSE:LH) CEO David King will continue with his leading role at the company, while Covance Inc. (NYSE:CVD) CEO Joe Herring will lead the Covance division of the new company.  While the acquisition is expected to be completed within the early months of 2015, Laboratory Corp said that is expects acquisition costs to total up to $100 million within the first three years or so of closing the deal.

Overall, Laboratory Corp. of America Holdings (NYSE:LH) needed to diversify its business to get the trend of ho-hum earnings reversed.  However, as Evercore ISI analyst, Michael Cherny stated, there are certainly some risks for Laboratory Corp as a result for this acquisition.  For one thing, there will be a significant combined cost of the acquisition and synergies.  Cherny also highlights risk in the late stage trajectory of the business, the economic sensitivity of the central lab and the potential to loss a few important contracts.  Laboratory Corp may have been thinking long term when it acquired Covance Inc. (NYSE:CVD), but there could be some turbulence in the short term to intermediate term as the new larger company looks to move in stride.

Disclosure: None