CASE STUDY

Laboratory Corp. of America
Purchased a full position in Laboratory Corp. of America Holdings (LH) at an average cost of $43.84 on 9/24/2004.

Company Description: LH is one of two dominant players in the U.S. lab testing services market, providing routine and esoteric diagnostic testing.  LH operates a national network of facilities and offers more than 4,400 lab tests.

Investment thesis:

  • Profitability:  LH was a highly profitable company (operating margin of 20%) and generated significant cash flow.
  • Balance Sheet Strength:  LH had $182 million in cash & equivalents and $888 million in total debt.  Because of LH’s stable business we did not believe their debt level would hinder future operations.
  • Growth Potential:  The diagnostic testing market had and continues to have strong growth.  Tests become more sophisticated (and thus more expensive) as technology improves and more frequent as the population ages (a 60 year old needs 3X the tests of a 40 year old).  We preferred LH to its larger competitor (Quest Diagnostics) because a higher percent of revenue was generated through more profitable esoteric tests.
  • Valuation:  We had a cash flow valuation of $56 for LH (27% discount).  LH was also cheaper than Quest on a forward P/E.

As of 12/31/2011, LH traded at $85.97

LH has returned 96%; Russell 1000’s total return has been 35%; continue to hold, price target $107

LabCorp Performance