JANA Partners attracted the attention of Wall Street analysts earlier this week when the activist hedge fund disclosed in its latest 13F filing that it had established a new stake of a little more than 800,000 shares in Laboratory Corp. of America, the life sciences company.
Jefferies analysts who follow the company raised their price target from $265 to $275 while maintaining their “Buy” recommendation. “The involvement of an activist investor highlights LH’s undervalued nature and likely prompts a strategic review to potentially unlock value,” Jefferies told clients in a note dated February 17 and obtained by Institutional Investor.
Meanwhile, Gorden Haskett called LabCorp “a two-headed business that has separation potential,” according to a separate note seen by II.
Just a few business days before JANA’s filing, UBS had also raised its price target, from $261 to $273, while maintaining its “Buy” recommendation.
Of course, there is no guarantee that LabCorp is currently an activist target or that JANA has even held conversations with the company.
In fact, JANA and most other activists in recent years have tried to build their full positions before they would be required to disclose their stakes in public filings.
JANA declined to comment.
LabCorp is involved in two major businesses: clinical laboratories and contract drug development services.
LabCorp Diagnostics is seen as an old-line business engaged in core testing and genomic and esoteric testing.
Covance, which LabCorp acquired in 2015, is a contract research organization, or CRO, that offers various services to pharmaceutical and biotechnology industries.
Shares of LabCorp have more than doubled from last year’s lowest closing price of $104 in March.
This is not too surprising given that the company is performing well thanks in large part to Covid-19.
The company said on its fourth quarter earnings call in the fourth quarter revenues surged 52 percent over a year ago to $4.5 billion driven by Covid testing.
Earnings before amortization, restructuring charges, and special items more than tripled, while operating cash flow rose nearly 36 percent.
Equity analysts were happy with the company’s 2021 guidance, which Jefferies said reflected an improving outlook that “isn’t adequately baked into the stock.”
The research firm speculated that JANA’s involvement “likely prompts a strategic review to potentially unlock value” in Covance. Jefferies added in its note that “investor frustration” has been high “given the stock’s continued highly discounted valuation and the lack of credit it gets for owning a higher growth CRO asset.”
According to Jefferies, LabCorp’s CRO peers trade on average at much higher multiples to cash flow, “suggesting meaningful potential value creation from a sale/spin-off of Covance.”
By the analysts’ calculation, that the stock would be valued at $285, or 21 percent above its current levels at the time of the report, if Covance received the same multiple as its peers.
The analysts at Gordon Haskett, meanwhile, noted similarities to JANA’s earlier investment in acute health care company Encompass Health, which the activist disclosed in its third quarter 13F filing.
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In a note earlier this week, the independent research firm pointed out Encompass Health’s similarity to LabCorp, calling it “a two headed beast” that has a high multiple business — home health — and a lower multiple business, inpatient rehab. “It is now exploring its separation options,” the Gordon Haskett analysts said.
Don’t expect LabCorp management to be too receptive to suggestions about breaking the company into two separate businesses or selling one of them, however.
On the fourth quarter earnings call, Adam Schechter, LabCorp’s chairman, president, and chief executive officer said, “I continue to believe that having diagnostics and drug development together is a winning scenario and that you can do significantly better with drug development business by having diagnostic capabilities. There’s no doubt in my mind that we’ve seen that with Covid.”
