For most of the corporate world, Covid-19 was a serious problem.
But for Hologic Inc. (HOLX, Financial), it was also an opportunity to grow its sales and net income. As it explained in its 10-K for fiscal 2022, it developed assays for detecting and assessing the Covid-19 virus. Both received Emergency Use Authorizations from the Food and Drug Administration.
As a result, revenues and earnings increased. However, active cases of the virus have slowed significantly, and the company has felt the effects. This chart shows the changes:
Medical Aesthetics refers to a division that was sold in 2020.
Still, the company, which specializes in women’s health issues, plans to keep growing.
About Hologic
The annual report tells us the company is a developer, manufacturer and supplier of premium diagnostics products, medical imaging systems and surgical products for women’s health.
It operates through four segments: Diagnostics, Breast Health, GYN Surgical and Skeletal Health. The first is the biggest contributor to revenue.
The U.S. generated 69.4% of fiscal 2022 revenue, while Europe contributed 19.7%, Asia-Pacific provided 7.7% and the rest of the world accounted for 3.2%.
Based in Marlborough, Massachusetts, the company had a market cap of $19.41 billion at the close on Jan. 19 and fiscal 2022 revenue of $4.86 billion. Its fiscal year ends on the last Saturday of September.
Competition
Hologic operates in highly competitive markets, with competitors varying by segment. For Diagnostics, its primary competitor is Becton, Dickinson and Co. (BDX, Financial). Breast Health competition includes General Electric Co. (GE, Financial) and Siemens AG (XTER:SIE, Financial). GYN Surgical competes with The Cooper Companies (COO, Financial), or Cooper Surgical, and Minerva Surgical Inc. (UTRS, Financial). Skeletal Health’s main competitors are GE and Orthoscan Inc.
Despite the competition, its cumulative total returns have generally outpaced the S&P 500 and the S&P 500 Health Care Supplies index over the past five years.
Financial strength
One consequence of the Covid-19 boost was the ability to keep reducing its debt.
Note, too, how its cash holdings have increased at the same time. Hologic also reversed its WACC versus ROIC revenue ratio.
For fiscal 2022, the weighted average cost of capital was 8.87%, while the return on invested capital was 19.20%.
In addition, its interest coverage ratio has improved, and it now generates $17.15 in operating income for every dollar of interest expense.
Both the Piotroski F-Score and the Altman Z-Score produce good outcomes. The former is 6 out of 9, while the latter is 4.59, meaning it is well within the safe zone.
This is a company in good financial health and has the wherewithal to support continued growth.
Profitability
Both its operating and net margins are leaders in the medical devices and instruments industry. The operating margin is 33.54% and the net margin is 26.78%.
Similarly, its return on equity and return on assets are industry-leading at 27.82% and 14.11%.
Hologic has allocated its capital well, allowing it to earn robust profits on both its equity and borrowed capital.
Growth
Yes, the company had a good burst of growth because of the pandemic, but this 10-year revenue chart shows it was already on an upward trend (averaging nearly 9% per year).
Growth of Ebitda was pulled out of a slump by the Covid-19 products.
Earnings per share without non-recurring items followed a similar path and has mostly headed higher.
Free cash flow was in a channel of sorts until the Covid-19 surge.
In summary, revenue jumped briefly because of the Covid-19 products, but has since returned to what may be a mean. Ebitda, EPS without NRI and free cash flow were pulled up by these products as well.
Dividends and share repurchases
Hologic does not pay a dividend, choosing instead to retain its earnings. It points out in the annual report that it uses its retained earnings to finance future growth through acquisitions, pay down its debt and to repurchase its own stock.
On the latter point, the company bought back 2,549,718 shares in fiscal 2022, at an average price of $70.36. Presumably, the company sees more upside for its share price since the shares were bought back near 10-year highs.
Generally, companies only buy back their shares when they consider them to be below their intrinsic value. So it appears the board of directors expects the earnings to keep growing and then push up the share price.
Valuation
The implicit message from Hologic is the shares were undervalued at about $70. However, we do not know by how much.
The GF Value Line considers anything over $67 as overvaluation, and so it concludes the Jan. 19 price of $78.69 to be modestly overvalued.
The price-earnings ratio, on the other hand, is low when compared to industry peers and competitors. Its price-earnings ratio is 15.37, well below the industry median of 26.04.
The PEG ratio shows undervaluation at 0.43. However, we must also look at the five-year Ebitda growth rate, which is relatively high at 36.10%. As we have seen, Ebitda got a short-term boost from the Covid-19 products, so we should we ignore the PEG ratio.
Considering the share repurchases, the GF Value chart and the price-earnings ratio, I would consider the stock modestly overvalued for short-term investors, but reasonably valued for an investor who plans to buy and hold.
Gurus
Hologic enjoys solid backing from the gurus, with 13F filings showing 10 of them owning shares at the end of the third quarter.
- Barrow, Hanley, Mewhinney & Strauss owned 2,388,880 shares, representing 0.96% of the company’s shares outstanding and 0.63% of the equity portfolio. It reduced its holding during the quarter by 0.6%.
- Jim Simons (Trades, Portfolio)' Renaissance Technologies held 2,235,461 shares after a reduction of 19.89%.
- Ray Dalio (Trades, Portfolio)'s Bridgewater Associates owned 599,399 shares after a reduction of 6.14%.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
The stock is a favorite of institutional investors who hold 97.38% of the shares outstanding, while insiders hold another 2.34%. Stephen P. Macmillan, the chairman, president and CEO, is heavily invested in the company. He owned 2,313,970 shares on Nov. 30, 2022.
Conclusion
Covid-19 products may have given Hologic a temporary boost, but the company has a solid financial base, is profitable and is growing its top and bottom lines. Good fundamentals mean future earnings growth and, in turn, higher share prices.
However, good news and good prospects mean Hologic is fairly valued and not a bargain.
