Labcorp’s 14.6% return over the past six months has outpaced the S&P 500 by 13%, and its stock price has climbed to $259.45 per share. This run-up might have investors contemplating their next move.

Is now the time to buy Labcorp, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Labcorp Not Exciting?

Despite the momentum, we're cautious about Labcorp. Here are three reasons why we avoid LH and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

In addition to reported revenue, organic revenue is a useful data point for analyzing Testing & Diagnostics Services companies. This metric gives visibility into Labcorp’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Labcorp’s organic revenue averaged 3.1% year-on-year growth. This performance slightly lagged the sector and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Looking at the trend in its profitability, Labcorp’s adjusted operating margin decreased by 13.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 13.8%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Labcorp’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Labcorp isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 15.7× forward P/E (or $259.45 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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