A Hologic production line
Photograph by Peter Bohler
Sometimes, you really can have it both ways. Consider medical-diagnostic company Hologic, a Covid-19-beneficiary but also a business that will benefit as life returns to normal.
To say that Covid-19 has been good for Hologic’s (HOLX) business is an understatement. The company, which provides molecular diagnostic equipment for Covid-19 PCR tests, saw sales in its diagnostics division grow to $1.1 billion during the fiscal first quarter that ended in December 2020, up from $312 million in the same quarter of 2019, while earnings quadrupled.
The market seems reluctant to give Marlborough, Mass.–based Hologic credit for that growth. While its stock has gained 52%, to $80.02, in the past 12 months, three times the S&P 500 index’s 17% rise during the same period, its price/earnings ratio has fallen. That’s a sign that investors expect the boost from Covid-19 testing to fade as the disease ebbs. Yet, the contraction in valuation overlooks the likelihood that testing will continue, while Hologic’s success with the coronavirus could lead to growth in its other businesses. For investors, Hologic looks like a bargain waiting to be snapped up.
Hologic was a much different company before the coronavirus arrived. Breast Health, which provides everything from screening to treatment, accounted for 39% of sales at the end of fiscal 2019, with diagnostics second, at 36%. Now, diagnostics has grown to 56% of revenue, while Breast Health has slipped to second, at 30%. GYN Surgical, the third-largest segment, is 10%, down from 13% in fiscal 2019.
Hologic is expected to post total sales of $5.8 billion in fiscal 2021, up 53% year over year.
Hologic currently trades for just under nine times fiscal-2021 estimated earnings of $8.95 a share, compared with its five-year average of nearly 19 times earnings. Larger Covid-19-test providers, such as Thermo Fisher Scientific (TMO) and Abbott Laboratories (ABT), fetch 23 and 25 times earnings, respectively, although Covid-19-test supplies are a much smaller part of their business.
By some estimates, the Covid-19 diagnostics business could fall by 35% in the next year, which helps explain Hologic’s steep discount. But Jefferies analyst Raj Denhoy thinks those concerns are overblown. Even with the vaccine rollouts, extensive testing may still be needed before surgery and travel, for instance, and around adoption of the vaccine itself. “The downward trajectory next year isn’t going to be as bad as people feared,” he says. “Covid testing probably will continue for quite some time.”
Besides, Hologic is more than just a bet on Covid-19 testing. Its growing diagnostic business has allowed it to place more of its devices in labs and hospitals around the country, and they are likely to stay there, especially because its automated testing is simpler than mixing and matching products from different companies. As a result, Hologic is well positioned to emerge in the postpandemic world with a larger market share in the broader molecular-diagnosis industry. That should help to offset any falloff in Covid-19-related revenue in years to come, says Wells Fargo analyst Dan Leonard.
Hologic is known as one of the largest players in breast-imaging technologies such as mammography. It also sells other medical devices used in gynecologic surgeries, biopsies, and other procedures. Those businesses were hurt last year, as fewer people had regular checkups or nonurgent procedures. But they recovered to prepandemic levels in the December quarter, bringing in total revenue of $482 million.
Things may only get better. “We expect to have a very good year in 2021 based on our contributions to Covid testing, as well as the continued recovery of our breast health, surgical, and broader diagnostics franchises that benefit women’s health,” says Steve MacMillan, Hologic’s chairman, president, and CEO.
With the tailwind of Covid-19 testing and a recovery in other business segments, Wall Street expects Hologic’s earnings to grow by 125% in fiscal 2021—and that’s atop a 64% gain, to $3.98 per share, in fiscal 2020. “They are going to be a strong beneficiary of the Covid-19 situation as well as the post-Covid environment,” says Ken Laudan, co-manager of the $1.9 billion Buffalo Discovery fund (BUFTX), which counts Hologic among its top holdings. “You have a business that would be hitting on all cylinders.”
Covid-19 has done wonders for Hologic’s cash flow. Laudan estimates that the company probably will generate $1.5 billion to $1.8 billion of free cash flow due to the Covid-19 opportunity. Denhoy is even more optimistic, predicting $2.5 billion to $3 billion in free cash from “insatiable Covid demand” over the next two years. That’s money that can be put to use for reinvestment, mergers and acquisitions, and stock buybacks. Hologic is planning to do all of that.
Hologic, which sports a market capitalization of $20.5 billion, repurchased 1.5 million of its shares—worth about $101 million—during the December quarter. The company just announced a $1 billion stock-repurchase authorization over the next five years. If it chooses to execute that entire buyback program, the total number of shares could be reduced by 5%.
Hologic is also looking to expand its business portfolio through acquisitions. It announced the purchase of two small firms in January—Biotheranostics, in molecular oncology diagnostics, and Somatex Medical Technologies, one of its suppliers in Germany. These deals seem to be a precursor to further transactions. On its latest earnings call two weeks ago, Hologic management said the company is pursuing a number of acquisitions and hopes to complete more deals this year.
One way or the other, Hologic will keep growing, and don’t be surprised if its valuation grows, too. At about 11 times 2021 earnings estimates, it would be worth $95, Leonard’s price target—up 11% from Thursday’s close. At 12 times earnings, the stock would be worth $106, Denhoy’s target, up 32.5%.
Either way, Hologic passes the test.
Write to Evie Liu at [email protected]
