Hologic Makes the Right Moves

 | Feb 07, 2014 | 10:35 AM EST
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We have recommended investing in Hologic (HOLX) over the last three months. The company had been poorly managed over the past several years as acquisitions and changing healthcare reimbursement trends weighed on firm-wide results.

 With the recent shareholder activism led by Carl Icahn and Relational Advisors, the board of directors at Hologic made a very significant change in the past quarter by naming Stephen MacMillan, the former CEO of Stryker (SYK), as the new CEO of Hologic.

On Monday, February 3rd, Hologic reported better-than-expected results of $612 million in revenues and 34 cents in earnings per share. The analysts were looking for $610 million in revenues and 31 cents in EPS. Many were holding their breath going into the call because they thought this would have been the quarter that the newly- appointed CEO would reset Hologic's numbers lower. To investors' surprise, the numbers were better than expected. The company also gave very upbeat guidance for the upcoming year.

Some of the key highlights of the call outlined the refreshing outlook of the highly- regarded new CEO. He talked about the strong industry-leading positions Hologic controls in 2D and 3D Imaging and Molecular Diagnostics. He also spoke about the opportunities the company had to expand a vastly underpenetrated international market and his intention of reducing the firm's financial leverage.

For the quarter, Hologic's Imaging unit came in above expectations with the continued roll-out of 3D tomography systems for breast imaging. The company dominates the space with an industry-leading market share and a revolutionary innovation to improve cancer imaging and detection. The core Molecular Diagnostic franchise also had solid results led by the APTIMA product line.

The company still struggled in the ThinPrep pap smear business as changing reimbursement guidelines for use had a sharp impact on the business. The GYN Surgical products groups (Novasure) also declined due to rising competition.

We walked away from the call feeling that something new and positive is going on at Hologic. The company will be different with two Carl Icahn appointees on the board, Relational Advisors' large position and new executive leadership with the previously- mentioned appointment of MacMillan as the CEO. 

The next few quarters could still be choppy for investors as the company cycles through the continued pressures at ThinPrep and Novasure. We expect the company to make meaningful progress, however, toward improving the business and shareholder value over the next 12 to 24 months.

At a recent price of $20.50, Hologic's shares are trading at 15.3x depressed earnings of $1.34 for the upcoming year, and 13.8x normalized earnings. The stock has historically traded for 15 to 20x EPS. At the current price, the shares are at or below the low end of the historical valuation band.

Management should be able to reaccelerate the top and bottom lines in the upcoming year and reduce the firm's leverage. The low valuation and operational improvements should provide meaningful upside from the current share price levels.

We like Hologic and believe it's a compelling and timely investment for the upcoming year. The combination of a strong medical products franchise, the high likelihood of a turnaround and the depressed valuation should lead to a significantly higher stock price.

The dominant market share positions, state of the art science and 20% activist ownership also open the possibility to an acquisition of the company. One way or another we expect better things for Hologic in the upcoming year.

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