Company Reports

Fortrea continues to face issues as a newly stand-alone company, and management lowered its 2024 guidance after second-quarter revenue fell more than expected and one-time costs contributed to a net loss of $138 million during the quarter. These headwinds are stronger than anticipated, and we have lowered Fortrea's fair value estimate to $27.20 per share from $35.50. Investors reacted negatively to Fortrea's quarterly results, and the stock plummeted 20%. We view shares as trading at a 26% discount to our fair value estimate, representing an opportunity for long-term investors with a high degree of risk tolerance as management works to right-size the business.

Fortrea is a global, late-stage contract research organization, or CRO, that provides comprehensive Phase I through IV clinical trial management, clinical pharmacology, and patient access solutions. Fortrea has a lengthy, 30-year history dating to the 1990s, originally part of Corning Incorporated's pharmaceutical services business. In 1997, Corning spun off this segment, which was named Covance. In 2015, Laboratory Corporation of America Holdings, or Labcorp, acquired Covance for $6.1 billion.

Narrow-moat Fortrea faced issues in its first quarter due to challenges associated with its 2023 spinoff. As a result, management revised its 2024 outlook by making an 11% reduction at the midpoint to its previously issued revenue forecast. Management also lowered its adjusted EBITDA guidance by 17% at the midpoint.

Fortrea reported year-end results, highlighted by total revenue exceeding $3.1 billion. We think Fortrea’s results are solid, especially given the challenges the company has faced in the year since its spinoff from LabCorp was announced as some customers became more hesitant to book new business due to uncertainty surrounding the spinoff. Management also announced the planned divestiture of its Patient Access and Endpoint Capital businesses to Arsenal Capital Partners for $345 million. Fortrea plans to use the majority of the proceeds to pay down its $1.6 billion in gross debt. Management’s goal of the divestiture is to allow Fortrea to sharpen its focus as a pure-play contract research organization and improve its financial flexibility. The divestiture is expected to close in the second quarter of 2024.

Fortrea is a global, late-stage contract research organization, or CRO, that provides comprehensive Phase I through IV clinical trial management, clinical pharmacology, and patient access solutions. Fortrea has a lengthy, 30-year history dating to the 1990s, originally part of Corning Incorporated's pharmaceutical services business. In 1997, Corning spun off this segment, which was named Covance. In 2015, Laboratory Corporation of America Holdings, or LabCorp, acquired Covance for $6.1 billion.

Fortrea reported solid third-quarter results highlighted by revenue of $776 million. The company is tracking our expectations and we maintain our fair value estimate of $35.50 per share. We view shares as undervalued, currently trading about 8% below our fair value estimate. Investors reacted positively to Fortrea’s results, sending the stock up over 10%.

We have launched coverage of Fortrea, a global contract research organization, or CRO, which was created after LabCorp spun off its clinical development business in June 2023. LabCorp had entered the CRO space through its acquisition of Covance in 2015 for $6.1 billion. We assign Fortrea a fair value estimate of $35.50 per share, and it's currently trading in 4-star territory about 19% below our fair value estimate. We believe Fortrea has a narrow economic moat based on its significant late-stage clinical trial exposure, regulatory expertise, and strong client relationships, which are supported by intangible assets and high switching costs.

Fortrea is a global, late-stage contract research organization, or CRO, that provides comprehensive Phase I through IV clinical trial management, clinical pharmacology, and patient access solutions. Fortrea has a lengthy, 30-year history dating to the 1990s, originally part of Corning Incorporated's pharmaceutical services business. In 1997, Corning spun off this segment, which was named Covance. In 2015, Laboratory Corporation of America Holdings, or LabCorp, acquired Covance for $6.1 billion.