Why Laboratory Corp Is Underappreciated By The Street

In a report published Tuesday, Maxim Group analyst Bryan Brokmeier maintained a Buy rating on Laboratory Corporation (NYSE: LH), while raising the price target from $141 to $160.Brokmeier believes that the company has "unmatched growth and value drivers," including revenue and cost synergies from its Covance acquisition, the recently announced Project LaunchPad cost savings/efficiency program and benefits from the Affordable Care Act (ACA). In fact, Brokmeier added that the "most misunderstood value driver" is the benefits from ACA.In the report Maxim Group noted, "The most recent CBO estimate is that 17M people will have gained insurance through 2015, and 23M are expected to gain insurance through 2016. Based on our model, 2.0 tests per person per year, and a 10% market share, we estimate that LH has: (1) a ($0.43) negative impact due to a mix shift to Medicaid; (2) a $0.63 positive impact from a volume increase; and (3) a $0.30 positive impact from a reduction in bad debt for a net $0.50 benefit in 2016."The cost synergies from the Covance purchase could exceed $100M. These cost synergies are expected to accrue from business optimization, corporate overhead, and purchasing and logistics. Laboratory Corp may realize immediate cost savings by eliminating duplicative corporate functions, improved global sourcing, logistics and facility consolidation, Brokmeier added. The company has projected revenue synergies of $300M by 2018, which it already seems to have begun to realize. "Covance won a $45M contract and is in discussions with five other biopharma customers because of the unique offering it can provide with exclusive access to LH's anonymous patient data, from which it can identify physicians with patients that may be best suited for specific clinical trials," the analyst commented. Laboratory Corp recently announced project LaunchPad to re-engineer its systems and processes, leverage technological advancements and create a more efficient business model. The company expects this initiative to result in net savings of +$150M over the next three years. The revenue estimates for 2015 and 2016 have been raised from $6,206 million to $8,555 million and from $6,392 million to $9,272 million, respectively.