Medical Lab Test Stocks Poised for Big Payday

Quest Diagnostics (NYSE: DGX ) and Laboratory Corp. of America (NYSE: LH ) may
be the Goliaths of the U.S. market for clinical laboratory testing, but the
David of the industry, Bio-Reference Laboratories (NASDAQ: BRLI ), has been a
giant in the eyes of investors  In the past two years, Bio-Reference is up
about 120% to $22.54. During the same period, Quest has been the poorest
performer of the three, gaining only 20%, while LabCorp shares have climbed 60%.
The picture is changing, though. So far in 2011, shares of all three companies
are up, but Quest has the biggest gain and Bio-Reference the smallest.  Some
suggest this is just a short-term aberration while others insist it's a sign
of things to come. Quest is the biggest independent research and testing
laboratory in the world, holding about a 15% share of the more-than-$50 billion
U.S. market. The company has been driving industry consolidation recently by
buying up some of its smaller competitors. In February, Quest acquired privately
held Athena Diagnostics for $740 million, boosting its share in the large market
for neurology testing, where its main competitor is LabCorp.  Last week, Quest
moved to buy Celera (NASDAQ: CRA ) for $671 million. This buyout would enable
Quest to get its hands on Celera's proprietary genetic tests and access to
proprietary genetic tests used by clients UnitedHealth (NYSE: UNH ) and Aetna
(NYSE: AET ), as well as a valuable diagnostic pipeline. Stealing
UnitedHealth's business away from Quest has enabled LabCorp to grow faster
than its main competitor. In fact, LabCorps three-year average return on equity
of 26.5% easily tops that of Bio-Reference Labs (18.4%) and Quest (19.3%).
During the past five years, LabCorp also has enjoyed a nice 14% gain in earnings
per share, outpacing Quest, but far behind the more than 25% gain turned in by
Bio-Reference. That trend is expected to continue during the next five years,
with Bio-Reference again maintaining its lead, although its growth rate is
expected to slow somewhat. The rosy outlook for all three companies is likely to
come from a number of factors. First, hospital laboratories will continue to
move in-house testing to commercial labs. In addition, the focus of healthcare
is moving from treating sick patients to wellness, prevention and early
detection of disease. The growing and aging population also will increase the
number of tests performed for each patient. Then there's the advent of
personalized medicine and targeted diagnostic tests, which is already helping
doctors make more informed therapy decisions and monitor the effectiveness of
treatment. However, the industry is facing some bumps in the road. Foremost
among them is political pressure to lower health care costs and budget cuts to
Medicare or Medicaid. Still, all three companies appear to be good bets for
investors. Lately, Bio-Reference may be feeling the effects of selling at a
premium to its two main competitors, with a P/E of more than 21 vs. 17 for
LabCorp and 14 for Quest.  Those who don't want to pick among the three might
want to consider the iShares Dow Jones US Healthcare Provider (NYSE: IHF )
exchange-traded fund. Quest and LabCorp are among its top 10 holdings.