HOLX - Hologic: Navigating The Covid Cliff

2023-11-21 13:46:19 ET

Summary

• Today, we take a deeper look at diagnostic and medical device concern, Hologic, Inc., whose stock has made a nice run here in November.
• The company is seeing impressive growth from some of its core divisions, but overall sales are falling as demand for its Covid tests fades.
• The company reported quarterly results earlier this month and management is buying back significant amounts of its own stock.
• Can the rally continue?  An analysis follows in the paragraphs below.

People would rather live in a community with unreasonable claims, than face loneliness with their truth "? Bangambiki Habyarimana.

Today, we put large medical device concern Hologic, Inc. ( HOLX ) in the spotlight. The stock has moved up strongly during the three-week rally we have seen in the overall market, and Hologic reported its fiscal Q4 results earlier this month. However, the shares are still down approximately five percent for all of 2023. More upside ahead? An analysis follows below.

Company Overview:

Hologic, Inc. is based just outside of Boston in Marlborough, MA. The company operates in four distinct segments: Diagnostics, Breast Health, GYN Surgical, and Skeletal Health. Hologic is focused on developing, manufacturing, and the distribution of diagnostics products, medical imaging systems, and surgical products for women's health through early detection and treatment. The shares trade for just north of seventy bucks a share and sport an approximate market capitalization of $17.6 billion.

The company's fiscal year begins on October 1st. Like most medical diagnostic concerns, Hologic was boosted by the pandemic as it sold items like COVID-19 assays, where demand has ebbed dramatically as the coronavirus has become endemic like the flu. Growth is now being primarily driven by the company's breast health product portfolio.

Fourth Quarter Results:

The company reported its Q4 numbers on November 9th. Hologic delivered non-GAAP earnings per share of 89 cents, a nickel a share above expectations. Net income for the quarter was down 24% from the same period a year ago to $90.6 million. The primary culprit was falling sales for its Covid-assays which shrunk GAAP margins by 80bps to 14%.

Revenues fell 5.5% on a year-over-year basis to $943.5 million, some $5 million north of the consensus forecast. It is important to note, that excluding Covid-related revenue streams, Hologic would have seen 17.5% organic growth from the same period a year ago. Reflecting this, diagnostic revenue fell just over 20% from the same period a year ago to $416.4 million. Organic molecular diagnostics ex-COVID grew 15% for the quarter. Revenues from breast health surged 28% over Q4 2022 to $352.8 million and sales from its small surgical division grew just over 10%.

Management provided the following FY2024 guidance. Leadership expects revenue of $3.92 billion - $4.02 billion. The top line of that range was right at the analyst consensus at the time, as was management's projection of non-GAAP EPS of $3.90 - $4.10 for FY2024.

Analyst Commentary & Balance Sheet:

The analyst community is not positive about Hologic's current prospects. Since Q4 2023 results hit seven analyst firms, including RBC Capital and Wells Fargo have reissued Hold/Sell ratings on the stock. Price targets proffered range from $72 to $82 a share. Leerink Partners ($90 price target), J.P. Morgan ($85 price target), and Mizuho Securities ($85 price target) all maintained buy ratings on the shares.

Approximately three percent of the outstanding float in the shares are currently held short. Three insiders sold nearly $1.8 million worth of equity collectively in the first half of this year. There has been no insider activity in this stock so far in the second half of 2023.

Operational cash flow was $258.7 million for the last quarter of FY2023. The company generated just over $1 billion in operational cash flow in FY2023. The company repurchased $238 million worth of its own stock in the quarter. Leadership added another $500 million of stock buyback authorization to its existing program of $499 million at the end of the quarter. Hologic also paid down $250 million of its outstanding floating rate debt at the end of October.

I don't see a fourth quarter 10-Q filed for Hologic yet. The company listed just over $2.76 billion of cash and marketable securities on its third quarter 10-Q . Hologic also had some $2.8 billion of long-term debt as of the close of its third quarter.

Verdict:

Hologic made $3.99 a share in FY2023 on $4.03 billion. The current analyst firm consensus has both revenues and earnings falling one percent in FY2024. They see growth returning in FY2025 as profits move just above $4.30 a share on mid-single digit revenue growth.

Management aims to grow their non-Covid sales at a five to seven percent clip in the years ahead. The company had non-Covid diagnostic sales of $1.48 billion in FY2023, which is 40% above the non-Covid year of 2019. Surgical revenues came in at just over $600 million, again some 40% above 2019's levels.

Management has done a solid job of growing its non-Covid-related business. However, valuations are not that compelling given no growth in earnings or revenues are projected for the just commenced FY2024 year. The stock trades at 18 times earnings and nearly four times revenues. Based on last year's run rate, the stock has an operational cash flow yield just north of 5.5% and no dividend payout.

Therefore, I don't find the risk/reward of HOLX compelling at current trading levels, and I personally would fade the recent rally. If I was a shareholder, I also would like to see management used its cash flow to pay down more debt rather than buy back stock at these valuation levels.

Truth is born into this world only with pangs and tribulations, and every fresh truth is received unwillingly. "? Alfred Russel Wallace.

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