KeyBanc Starts Lab Corp Of America At Overweight, But Indebtedness Is A Concern

In a report published Tuesday, KeyBanc analyst Donald Hooker initiated coverage of

with an Overweight rating and price target of $143. The analyst believes that there could be upside to the consensus projections, driven by early momentum in synergies from the

acquisition, along with pricing improvements on preclinical research and a healthy biopharmaceutical research market. "Looking ahead, we model revenues to steadily accelerate to 5.5 percent by 2017 driven by the rollout of 174 laboratory tests over the past year, many of which are in growth verticals such as women's health and oncology," Hooker said. In addition, Covance has been benefiting from the favorable biopharmaceutical R&D capital markets and potential for an increase in pricing for toxicology studies. "Notably, Covance recently won two Phase III studies due to its ability to access LabCorp's diagnostic testing data and enroll patients with specific genetic profiles," the KeyBanc report stated. The analyst expects revenue synergies from Covance of about $70 million in 2016 and $120 million in 2017. Mid single digit top line growth is expected to lead to over 13 percent growth in EPS through 2017. "We believe management's efficiency initiatives will now have accentuated visibility to LabCorp's bottom line given the relatively stable reimbursement environment for clinical laboratories. This will likely be enhanced by ~$100M of cost synergies associated with the Covance acquisition from the elimination of redundant overhead as well as facility and systems rationalization," Hooker added. Also, about 100bps of annual margin expansion is expected due to an higher mix of high priced, specialized lab tests for breast cancer, hepatitis C, non-invasive prenatal testing and more.