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Carl Icahn Bets on Hologic; Should You?

August 19, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Hologic Inc. (HOLX), a $7.06 billion market cap company, which is a company that develops, manufactures and markets x-ray systems. It operates through four segments: Diagnostics, Breast Health, GYN Surgical and Skeletal Health.

Two differences

Two things are really important and characterized this company. First, the company´s structural competitive advantages as well as its management turnover, are making a difference in the market. Hologic controls 65% of the U.S. digital mammography market. In 2003 the firm sold its first FDA-approved digital mammography system in the U.S. A potential upside driver includes faster than expected tomosynthesis adoption. Tomosynthesis is a new technology to produce (3D) images. The firm was the first to offer a 3D digital system in the U.S. taking advantage over its peers, such as General Electric, Agfa, Siemens, Philips and Johnson & Johnson.

Acquisitions and more

In 2012, it acquired Gen-Probe, a leading maker of molecular diagnostic products, searching for cost synergies. Moreover, Gen-Probe´s products are ideal to penetrate regions with good prospects to grow (BRIC countries). The Diagnostics products segment has reported a strong increase with a growth of nearly 100%, and we expect much more upside potential in this segment.

Following that acquisition, the firm also holds privileged positions in a host of diagnostic tests catered to women’s health that run solely on its proprietary instrumentation.

Forward looking

Hologic will be capable of navigating the stabilization of Pap smear volumes as its lab instrumentation continues to gain traction, and it broadens its testing menu.

Hologic plans to expand in emerging markets, promising countries such as China, which should provide with a new growth catalyst basically because of two thing: the growing middle class and the aging population.

Revenues, margins and profitability

Looking at profitability, revenue growth by 1.03% led the earnings per share increase in the most recent quarter compared to the same quarter a year ago ($0.04 vs -$0.04). During the past fiscal year, the company reported poor results of -$4.33 versus -$0.27 in the prior year. This year, Wall Street expects an improvement in earnings ($1.45 versus -$4.33).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

HOLX

Hologic

-60.41

ALR

Alere Inc.

-3.43

GE

General Electric

10

 

Industry Median

8.68

The company has a negative current ROE which is a weakness of the company. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

1408419160293.png

Relative Valuation

In terms of valuation, the stock sells at a price-to-book ratio of 3.5x which indicates a premium versus the industry average of 3.02x while the price-to-sales ratio of 2.79x is above the industry average of 2.91x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $17,911, which represents a 12.3% compound annual growth rate (CAGR).

1408419142356.png

Final comment

I think the Health Care Equipment industry will remain profitable in the long term as there is an increase in the age of the population. It is important to mention that Hologic offers the only FDA approved breast tomosynthesis platform and this is really good because digital platforms are popular and demanded.

Hedge fund gurus like Jim Simons (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014. Should you?

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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