Market Overview

KeyBanc Projects 'Significant' Consolidation In Lab Testing Sector

KeyBanc Projects 'Significant' Consolidation In Lab Testing Sector

Laboratory Corp. of America Holdings (NYSE: LH) and Quest Diagnostics Inc (NYSE: DGX) could benefit from a "significant wave" of consolidation in the lab testing and diagnostics sector, according to KeyBanc Capital Markets. 

The Analyst

Analyst Donald Hooker upgraded Laboratory Corp. from Sector Weight to Overweight with a new $210 price target. The analyst maintains a Sector Weight rating on Quest Diagnostics with no assigned price target.

The Thesis

Consolidation within the lab testing space is likely to occur as a result of both UnitedHealth Group Inc (NYSE: UNH) and Aetna Inc (NYSE: AET) opening up their networks to include both Laboratory Corp. and Quest Diagnostics as in-network providers, Hooker said in a research report.

UnitedHealth previously contracted only with Laboratory Corp. and hundreds of smaller regional labs, while Aetna contracted only with Quest Diagnostics and hundreds of smaller regional labs.

Laboratory Corp. and Quest Diagnostics are "by far" the lowest-cost labs, with industry leading economies of scale, but only account for less than 30 percent of the total $50-billion non-inpatient lab spending market, Hooker said. The fact that Aetna and UnitedHealth will do business with both companies should lead to "significant consolidation" of independent lab providers, the analyst said. 

Related Link: Labs Are 'Relative Safe Havens' In Health Care Services, Morgan Stanley Says In Quest Diagnostics Upgrade

Laboratory Corporation Upgraded

Laboratory Corp. will only see a "modest" net revenue attrition in reaction to UnitedHealth opening its network to include rival Quest Diagnostics, Hooker said. It is likely the company anticipated this event years ago, which implies less negative pressure on profitability than investors may assume, he said. 

After at least 10 years of being the exclusive lab provider to UnitedHealth, most of Quest Diagnostics' gains will come at the expense of smaller labs, as there is a "good level of stickiness" with UnitedHealth's providers, the analyst said. In addition, Laboratory Corp.  can win back around half of any lost revenue from UnitedHealth with its new exposure to Aetna's network, Hooker said. 

Laboratory Corp. still owns one of the largest global contract research organizations via its 2015 acquisition of Covance and 2018 acquisition of Chiltern International, Hooker said. This business should account for around 38 percent of total consolidated revenue, with future growth coming from a planned global expansion in the coming quarters.

Base Case Improves For Quest Diagnostics

Quest Diagnostics' new exposure to UnitedHealth's network should at the very least generate $70 million in incremental revenue in 2019 and $150 million in incremental revenue the following year, as the company will allocate most of its $75 million of tax savings to gain market share, Hooker said. This should generate an incremental $28 million in EBITDA in 2019 and $59 million in 2020, he said. 

Quest reiterated its 2020 revenue growth target of 3-5 percent and will continue paying investors a dividend and buying back its own stock, the analyst said. Yet the stock is already trading at a "full valuation" at an 11x 2019 adjusted EBITDA estimate of around $1.7 billion, he said.

On a next-12-months basis, the stock is trading at 12x EBITDA, which is already a premium to its three-year average multiple of 10x and at the high-end of its 8x to 12x range.

Price Action

Shares of both Laboratory Corp. were down 0.43 percent at the time of publication Thursday, while Quest Diagnostics was down 0.39 percent. 

Related Link: WHO Deems The Products Of These Diagnostic Companies 'Essential'

Latest Ratings for DGX

Aug 2019MaintainsOverweight
Jul 2019MaintainsNeutral
Jul 2019MaintainsOverweight

View More Analyst Ratings for DGX
View the Latest Analyst Ratings

Posted-In: Diagnostics Donald Hooker KeyBanc Capital Markets Lab TestingAnalyst Color Health Care Analyst Ratings General Best of Benzinga


Related Articles (AET + DGX)

View Comments and Join the Discussion!

Latest Ratings

PNRJefferiesInitiates Coverage On
IPHIBank of AmericaMaintains80.0
View the Latest Analytics Ratings
Don't Miss Any Updates!
News Directly in Your Inbox
Subscribe to:
Benzinga Trading Daily
Get pre-market outlook, mid-day update and after-market roundup emails in your inbox.
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Thank You

Thank you for subscribing! If you have any questions feel free to call us at 1-877-440-ZING or email us at

Fintech Looks To Blockchain To Stem The Global Pension Meltdown

Morgan Stanley Isn't Buying Tesla's Claims For Profitability, Positive Cash Flow, China Prospects