Over the past six months, Labcorp has been a great trade, beating the S&P 500 by 6.9%. Its stock price has climbed to $255.01, representing a healthy 13.9% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
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.
Despite the momentum, we're swiping left on Labcorp for now. Here are three reasons why we avoid LH and a stock we'd rather own.
Why Is Labcorp Not Exciting?
Founded in 1978, Labcorp Holdings (NYSE:LH) is a life sciences and diagnostics company that provides clinical testing, drug development, and medical testing solutions.
1. Slow Organic Growth Suggests Waning Demand In Core Business
We can better understand Testing & Diagnostics Services companies by analyzing their organic revenue. 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 2.4% 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 one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Looking at the trend in its profitability, Labcorp’s adjusted operating margin decreased by 10 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
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. Unfortunately, Labcorp’s ROIC has decreased significantly over the last few years. 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’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 16× forward price-to-earnings (or $255.01 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the most dominant software business in the world.
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