Hologic Looks Reasonably Valued As Business Normalizes After The Pandemic

The pandemic is not completely finished, but the Street has nevertheless turned to the question of what the new normal will look like for Hologic (NASDAQ:HOLX) as high-margin COVID-19 testing fades. The pandemic left the company in an excellent position with respect to system placements, and I believe pandemic-driven placements will create a significant barrier to entry for newer systems. At the same time, normalizing procedure counts and improving component availability should help the surgical and imaging businesses.

Hologic shares are up about 10% since my last update, outperforming Abbott (ABT), Bio-Rad (BIO), bioMerieux (OTCPK:BMXXY), and Qiagen (QGEN) over that time. I expect long-term core revenue growth of around 5% to 6% from here for Hologic, but the company will have the liquidity to be more active in M&A if management can find suitable targets. I also see opportunity for higher margins from here, but the valuation anticipates a lot of this. Hologic is a good company and holding good companies at reasonable valuations can work long term, but I wouldn’t call this a screaming bargain.

 

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Hologic Looks Reasonably Valued As Business Normalizes After The Pandemic

Hologic's Underperformance Makes This A Name Worth Further Consideration

Despite some impressive recent quarters, Hologic (NASDAQ:HOLX) shares have underperformed since my last update on this diversified diagnostics and women’s health company. Hologic has benefited from an unexpectedly strong “tail” to COVID-19 testing revenue, but underlying performance has been solid as well, and the company is now in a much stronger position than it was before the pandemic.

Hologic shares are down about 6% since my last update on the company, underperforming the broader medical device space, but not faring too poorly next to names like QIAGEN (NYSE:QGEN), Bio-Rad (NYSE:BIO) or bioMerieux (OTC:BMXXY). If Hologic can hit my target of mid-single-digit long-term revenue growth, double-digit free cash flow growth, and mid-30%’s “post-COVID” EBITDA margins, these shares look undervalued below the low-$80’s.

 

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Hologic's Underperformance Makes This A Name Worth Further Consideration

Managing The COVID-19 Testing Decline Will Be Tricky, But Hologic In Strong Shape For The Next Chapter

 

While it is definitely too soon to just assume that the COVID-19 pandemic is over and done with, the rapid expansion of vaccinations does appear to be reducing transmissions, and with that, there has been a noticeable decline in testing in the United States. It remains to be seen, though, how many people will ultimately choose to be vaccinated, how new variants may impact the vaccinated, and how long the vaccines will be effective. With that, the path of COVID-19 testing in the U.S. is highly uncertain.

As a major player in COVID-19 testing, that creates definite challenges for modeling Hologic (HOLX) financials today. It’s inarguable that the pandemic has led to a significant expansion in the company’s diagnostics business footprint, but how quickly COVID-19 testing will scale down is a major unknown and has a significant impact on the financials.

I believe the core of Hologic is in good shape and that the company will be able to leverage some of the gains made during the pandemic to take the diagnostics business to a new level. I expect mid-single-digit core growth at Hologic from the post-COVID-19 trough, as well as further M&A, and I believe the shares still offer worthwhile upside to long-term investors. Less patient investors should be aware, though, that the shares could be quite volatile as the testing situation shakes out over the next two to three years.

 

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Managing The COVID-19 Testing Decline Will Be Tricky, But Hologic In Strong Shape For The Next Chapter

The Motley Fool: Is Becton, Dickinson and Company a Buy?

The general theme of med-tech earnings through this cycle seems to be that the market has gotten a little bit ahead of many of the companies, leading to earnings reports that the sell-side characterizes as "slightly disappointing." Among those is Becton Dickinson (NYSE: BDX  ) , a generally reliable company that is structured more for long-term performance than short-term growth. Analysts seem focused on the weak results in diagnostics, but the overall picture hasn't really changed all that much.

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Is Becton, Dickinson and Company a Buy?

Seeking Alpha: Cepheid's Results And Shares Are On Different Paths

Within the higher-growth molecular diagnostics segment of diagnostics, Cepheid (CPHD) remains one of the real up-and-comers. Roche (OTCQX:RHHBY) still has quite a bit more market share than Cepheid (and/or anybody else), but Cepheid stands shoulder to shoulder with big names like Abbott (ABT), Becton Dickinson (BDX), and Hologic (HOLX) and actually has leading share in terms of systems placement. Margins are still a "build it and they will come" sort of proposition, but as Cepheid continues to develop and launch high-volume tests, it should be in position to reap significant leverage down the road.

The concern here is that the market is already a long ways down that road in terms of valuation. Even if the company can more than double its share of the MDx market and generate FCF margins on par with the best companies, the shares are already well ahead of the implied value. Assigning Cepheid the typical top-of-the-range med-tech growth multiple of 8.0x forward sales produces a more attractive $55 target, more than 20% above today's price, but that multiple may be harder to maintain if the market really is turning away from aggressive growth stories in the healthcare space.

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Cepheid's Results And Shares Are On Different Paths

The Motley Fool: A Whole New Opportunity For Hologic Inc?

Women's health specialist Hologic (NASDAQ: HOLX  ) has had a rough go of it. At a time when most companies in the medical equipment or diagnostics markets can look back on a great two-year run in their share prices, Hologic's shares have chopped around and gone nowhere fast (up just 2%). This isn't a mistake on the part of the market, as Hologic has underperformed due to slow adoption of 3D tomosynthesis, changing recommendations for cervical cytology testing, and fiercer competition in diagnostics.

In hiring former Stryker CEO Stephen MacMillan, though, the board may have put this company back on the right track. MacMillan's experience in improving sales efforts and integrating acquisitions both speak to areas where Hologic needs to improve, and there is certainly room for improvement here.

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A Whole New Opportunity For Hologic Inc?

The Motley Fool: Becton, Dickinson & Co Poised To Be A Large-Cap Growth Leader

When the worst thing you can say about a company is that its stock doesn't look very cheap, that's not a bad situation. It is challenging for me to see substantial undervaluation in Becton Dickison (NYSE: BDX  ) these days, even given the company's excellent share in safety devices, pre-filled syringes, and autoinjectors, and above-average growth in emerging markets. Although I'd be in no rush to sell, I would suggest investors keep an eye on the changes under way throughout the diagnostics industry.

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Becton, Dickinson & Co Poised To Be A Large-Cap Growth Leader

Seeking Alpha: November Brings A Cold Gust Of Reality To Hologic

Diagnostics and healthcare imaging specialist Hologic (HOLX) has been an odd duck within my coverage list for some time. The company has a pretty mixed record of creating shareholder value, with a pronounced tendency to overpay for M&A deals and then under-develop the technology it acquires. And yet, investors and analysts have generally stuck by the company, likely afraid to turn their backs on the potential of 3D mammography and molecular diagnostics.

With fiscal fourth quarter results in hand and disappointing guidance for fiscal 2014 laid out in black and white, investors sold the shares off sharply on Tuesday. Even with the reset in expectations and valuation I struggle to see a major mispricing in these shares as there seems to be a piece of bad news to offset almost all of the bullish points. I am not really expecting this latest disappointment to puncture the optimism bubble around Hologic, but I can't get all that excited about a company that appears to need a lot of work to get back to fighting (i.e., "growth") trim.

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November Brings A Cold Gust Of Reality To Hologic

Investopedia: Hologic Struggling To Find A New Path

Hologic's (Nasdaq:HOLX) difficult midlife crisis continues. With its core cervical cancer screening business struggling in response to new recommended testing intervals and the 3D tomo mammography business slow to ramp up, Hologic is a distressing mix of sluggish organic growth and a debt-laden balance sheet. While some investors seemed encouraged by the company's move to bring back its former CEO, there's a lot of work to be done to carve out an attractive growth path for this company.

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http://www.investopedia.com/stock-analysis/080713/hologic-struggling-find-new-path-holx-dgx-ge-bdx.aspx

Investopedia: Becton Dickinson Already Priced For Excellence

It's pretty rare to see an “Underperform” rating on a med-tech stock these days, but Becton Dickinson (NYSE:BDX) carries more than Johnson & Johnson (NYSE:JNJ), Abbott (NYSE:ABT), and Cepheid (Nasdaq:CPHD) combined. I won't pretend to have read all the research reports out there, but it seems that most of those analysts who are cautious/negative on BD are so because of the stock's very robust valuation and concerns about both near-term and long-term growth in the diagnostics business. I too see these shares as overpriced relative to the likely growth trajectory, and wouldn't be a buyer at these levels.

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Investopedia: Recent Financials May Not Be Entirely Fair To Hologic

I have no qualms with those who believe it is the responsibility of the management of public companies to communicate clearly and accurately with investors (and analysts) about the current state of the business and the likely near-term conditions. Likewise, I don't particularly object when the Street punishes those companies that come in short of expectations without having given suitable warning.

So I can understand some of the disappointment with Hologic (Nasdaq:HOLX) these days – the company arguably could have done a better job communicating (and adjusting expectations) in regards to the fall-off in 2D mammography, ThinPrep, and the Chinese business. At the same time, though, I see a lot of what's troubling Hologic as macro issues impacting the sector as a whole. As the company is continuing to execute reasonably well on costs and the Gen-Probe integration, today's share price may be something of an opportunity.

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Seeking Alpha: Luminex Has Both Many Opportunities And Many Questions To Answer

While I'm not opposed to paying up for a strong growth story, particularly in an area like molecular diagnostics (MDx), I think there are too many questions about the basic business model at Luminex (LMNX) to pay up for this stock today. The company does indeed have significant potential and large addressable markets, but the combination of inherent business model volatility, less than full control on product development, and rampant technological and commercial competition are all significant factors as well.

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Luminex Has Both Many Opportunities And Many Questions To Answer

Seeking Alpha: Should Med Tech Head For The Dunes?

Playing the mix-and-match merger and acquisition game is a favorite pastime of bored med-tech analysts everywhere, and it doesn't hurt that the combination of below-average deal activity in 2012 and the advent of the medical device excise tax in 2013 point to more deals on the way. Today, though, I wonder whether or not a large med-tech company will step up and acquire privately-held Dune Medical and its potentially revolutionary MarginProbe cancer detection system.

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Should Med Tech Head For The Dunes?

Investopedia: How Far Can Philips' Turnaround Take The Stock?

I have to be honest right off the bat - I didn't think Philips (NYSE:PHG) had what it would take to really get the business turnaround they needed. Yet, here we are with this European conglomerate reporting steady mid-single digit organic growth and improving margins. While I definitely missed the potential for Philips' self-improvement in 2012 (and the stock performance that has doubled the S&P 500), I still have some long-term fundamental questions about where Philips stands against the competition and whether sell-side analysts (and investors) are expecting too much from this company.

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http://www.investopedia.com/stock-analysis/2012/How-Far-Can-Philips-Turnaround-Take-The-Stock-PHG-GE-SI-HOLX1213.aspx

Investopedia: Time For Hologic To Translate Technology Into Results

How does an investor profit if a company has the best technology in the world, but can't deliver market-beating returns? That's probably a harsh intro for Hologic (Nasdaq:HOLX) today, but the fact remains that the company has to demonstrate that it can drive tomosynthesis adoption and solid growth in diagnostics for this stock to really work over the coming years. That puts the shares in a challenging place for investors; bulls can likely see a lot of value here, while bears will point to the high debt and oncoming competition and likely conclude that the shares are best avoided for now.

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Seeking Alpha: Hologic Seems A Little Underrated

Big deals carry big risks, and Hologic (HOLX) does not have a great record with big deals. Couple that with a difficult hospital spending environment and I can understand why Hologic shares trade at a discount to fair value. That said, investors who want to buy into women's health and diagnostics could certainly do worse than to consider this name.

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Hologic Seems A Little Underrated

Seeking Alpha: Can Intuitive Surgical Drive Wider Adoption Fast Enough To Maintain Multiples?

Coming out of second quarter earnings, it's as clear as ever that surgical robot company Intuitive Surgical (ISRG) does not have the luxury of being casual about driving wider adoption of its daVinci robotic surgical system. While the U.S. prostatectomy market is not going to disappear, the multiples on this stock leave almost no room for disappointment and declines in this long-time core market are starting to weigh on procedure volumes.

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Can Intuitive Surgical Drive Wider Adoption Fast Enough To Maintain Multiples?

Seeking Alpha: Another Disappointing Quarter Still Doesn't Make Cepheid Cheap

So far, this has been a tough quarter for some of the growth darlings of the medical technology sector. It's still somewhat early in the reporting cycle, but Intuitive Surgical (ISRG) and MAKO Surgical (MAKO) have both disappointed, and Cepheid (CPHD) joins that unfortunate list for the second time in as many quarters. While the sort of operational disturbances that Cepheid is seeing are not at all uncommon with small, young companies, the cripplingly high expectations built into the stock give it little room to breathe.

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Another Disappointing Quarter Still Doesn't Make Cepheid Cheap

Investopedia: Agilent Pays A Hefty Price For A Fixer-Upper Diagnostics Company

It was just a day ago that I wrote, in reference to Agilent's (NYSE:A) probable M&A strategy, "I would be surprised if the company targeted sequencing or diagnostics." Well, color me surprised, as Agilent announced on the morning of May 17 that it will be acquiring Danish oncology diagnostic company Dako for $2.2 billion in cash.

Not only is this the company's largest deal to date, but it represents an entry into a new market - the multi-billion dollar world of diagnostics. While the growth potential in diagnostics explains Agilent's interest (to say nothing of the high-margin consumables sales that go with it), Agilent is paying a hefty price for a company that badly needs to refresh its product line-up and lags some very large competitors.

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Seeking Alpha: Trading Margins For Growth Isn't Going To Help Becton Dickinson

Becton Dickinson (BDX) has been a single-digit grower for most of the past decade, and that really hasn't seemed to bother anybody. There's nothing wrong with consistent high-quality performance, particularly when accompanied by improving free cash flow conversion. Although one quarter, or even one year, proves little, I do wonder if the recent trends in margins are just an aberration or a sign that management is having to push harder to find more growth.

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Trading Margins For Growth Isn't Going To Help Becton Dickinson