LabCorp's Q2 Falls In Line With Our Expectations; Our Fair Value Estimate Is Unchanged

LabCorp’s second-quarter results generally met our expectations for continued softening in COVID-19 PCR tests. With these effects reverberating through the top and bottom lines, the firm remains on track to reach our full-year projections, and we’re leaving our fair value estimate unchanged. With quarterly diagnostic revenue down 4.7%, LabCorp’s performance in this segment was a hair worse than what was seen at rival Quest Diagnostics. Nonetheless, these results do not deviate significantly from our estimates for 2022, and we’re maintaining our assumptions. Perhaps the bigger news was the firm’s announcement that it would spin off its clinical drug development division (legacy Covance) in 2023. This news comes on the heels of the firm’s strategic review in 2021 that culminated in the decision six months ago to hold on to its drug development segment. At first blush, we see little to change our view of LabCorp’s narrow economic moat, as we think the firm’s significant cost advantage in its diagnostics business was compelling enough to warrant the moat even before its acquisition of Covance.