Hello? where were these LBO types a few years ago when Lab Corp was selling for only 10X free cash flow? I figured for sure as I was buying the stock that the company would either take itself private or the stock would recover.
Turns out the stock recovered -- what was once a stock in the high 20's at 10X cash flow, is now a stock near $80 and a high teens multiple of free cash flow. I think a deal is more likely with Quest Diagnostics because that stock is cheaper and there is more room for improvement post UNH loss (Lab Corp won exclusive deal with UNH last year -- likely cutting 7% of Quest's revenues this year). The great thing about a deal for Quest is that the pricing concerns that have been surrounding Lab Corp should go away -- hard to see Quest handle the debt of a buyout and start a price war.
I like Lab Corp because of the strong free cash flow, the disciplined capital allocation of management, the fact that lab testing provides all the info doctors use, while only generating 4% of health care costs and the consistent growth for the industry driven by new genomic related tests. Not to mention that the valuation is still reasonable.
If Quest goes, I will be happy because my LH should become more valuable. If LH goes, I will be sad to lose such a consistent outperformer but I will redeploy the money -- probably some into Techne (TECH).
Quest makes perfect sense so I expect it to happen. I don't expect a LH deal unless the stock stumbles.
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