Labcorp Holdings: How Non-GAAP Adjustments Reveal a Stronger Earnings Story and a Potentially Undervalued Stock

In the world of diagnostics and biopharma lab services, Labcorp Holdings (NYSE:LH) has long been a bellwether for operational efficiency and innovation. However, a closer look at its financial reporting reveals a critical nuance: the company's non-GAAP adjustments and one-time expenses significantly distort its statutory earnings, masking a stronger underlying performance. For investors, understanding these adjustments is key to unlocking the true value of Labcorp's business—and recognizing why the stock may be undervalued.

The Non-GAAP Maze: What's Excluded and Why It Matters

Labcorp's 2025 non-GAAP adjustments strip out a range of items that, while material to GAAP earnings, are not indicative of core operations. These include:
- Amortization of intangibles ($137.9M for six months): A recurring cost from acquisitions that reduces GAAP net income but is excluded to highlight organic performance.
- Restructuring and LaunchPad costs ($10.5M + $37.3M): One-time expenses tied to process improvements and facility consolidations.
- Loss on venture fund investments ($36.1M): Volatile gains/losses from speculative bets, excluded to focus on core lab services.
- Acquisition-related costs ($44.2M): Fees from M&A activity, which are excluded to avoid distorting earnings from ongoing operations.

By removing these items, Labcorp's adjusted operating income for Q2 2025 rose to $531.6M (15.1% of revenue), compared to GAAP operating income of $394.5M (11.2%). Similarly, adjusted EPS hit $4.35, a 10.4% increase from 2024, versus GAAP EPS of $2.84. This 53% gap between adjusted and GAAP earnings underscores how non-GAAP metrics paint a far more optimistic picture of Labcorp's profitability.

Why Adjustments Matter for Investors

Non-GAAP adjustments are not unique to Labcorp, but their scale and consistency here warrant scrutiny. For instance, the company's $36.1M loss on venture fund investments—a volatile line item—was excluded from adjusted net income. While such investments may align with long-term innovation goals, they introduce noise for investors seeking to assess operational stability. Similarly, LaunchPad costs ($37.3M for six months) reflect strategic process improvements, but these are one-time expenses that could recur in future periods, diluting future GAAP earnings.

The key takeaway: Investors must distinguish between sustainable earnings (adjusted) and transitory or speculative items (GAAP). Labcorp's adjusted metrics suggest a business with robust margins and disciplined cost management, while GAAP figures understate its operational strength.

Valuation Implications: A P/E Discrepancy

Labcorp's stock currently trades at $265.85, with a market cap of $22.09B. Using GAAP EPS of $2.84, the trailing P/E ratio is 93.6, a staggering multiple that appears disconnected from industry norms. However, when using adjusted EPS of $4.35, the P/E drops to 61.1, a more reasonable valuation.

Comparing this to industry averages:
- Diagnostics & Research industry P/E: 26.98
- Biopharma sector P/E: 20.52

Even at 61.1, Labcorp's adjusted P/E is significantly higher than its peers. But this overlooks the company's 10.4% year-over-year adjusted EPS growth and 9.5% revenue growth in Q2 2025. When factoring in these growth rates, the stock's forward P/E (based on updated 2025 guidance of $16.05–$16.50 adjusted EPS) falls to 16.3–16.5, a compelling discount to industry averages.

The Case for Undervaluation

Labcorp's strategic investments in oncology, Alzheimer's diagnostics, and digital pathology are poised to drive long-term growth. Recent acquisitions, such as Incyte Diagnostics and BioReference Health, have expanded its footprint in high-margin segments. Meanwhile, its $1.13B–$1.28B free cash flow guidance for 2025 supports aggressive shareholder returns (e.g., $200M in stock repurchases and a $0.72 quarterly dividend).

Yet, the market remains anchored to GAAP metrics, which understate the company's cash-generating power. For example, Labcorp's GAAP net income of $237.9M in Q2 2025 excludes $75.3M in tax benefits from non-GAAP adjustments. This creates a false impression of earnings volatility, deterring value-conscious investors.

Investment Thesis: Buy the Stock, Not the Narrative

Labcorp's non-GAAP adjustments are not a gimmick but a tool to highlight its core strengths. The company's 15.1% adjusted operating margin, 10.4% adjusted EPS growth, and $1.13B free cash flow midpoint suggest a business with durable competitive advantages. At a forward P/E of 16.3–16.5, the stock is trading at a 30–40% discount to industry averages, offering a margin of safety for long-term investors.

Risks to consider: Regulatory pressures in diagnostics, potential margin compression from healthcare cost controls, and the volatility of venture fund investments. However, Labcorp's diversified revenue streams, strong balance sheet ($5.08B debt, $647.3M cash), and disciplined capital allocation strategy mitigate these risks.

Conclusion

Labcorp Holdings' non-GAAP adjustments may seem opaque at first glance, but they reveal a company with exceptional operational discipline and growth potential. By focusing on adjusted metrics, investors can see a business that is not only outperforming its peers but also trading at a significant discount to its intrinsic value. For those willing to look beyond GAAP, Labcorp offers a compelling opportunity to capitalize on the next phase of its evolution.

Final Recommendation: Buy Labcorp (LH) at current levels, with a 12-month price target of $300–$320 (implying 13–17% upside) based on normalized earnings and industry valuation benchmarks.