Company Overview: Hologic, Inc. (NASDAQ: HOLX) has its headquarters in Bedford, MA, and is engaged in developing, manufacturing, and supplying diagnostics, medical imaging systems and surgical products, which helps to improve the healthcare requirements of women. The company has four reportable segments, namely (1) Diagnostics, (2) Breast Health, (3) GYN Surgical, and (4) Skeletal Health.

HOLX Details

Acquisition Synergies & Robust Product Adoption to Aid HOLX: Hologic, Inc. (NASDAQ: HOLX) develops, manufactures, and supplies medical imaging systems, premium diagnostics products, and surgical products, which are mainly focused on early detection and treatment of women's health and well-being. Despite the COVID-19 led turmoil, the company’s Diagnostics business has been gaining potency, thanks to its strong Molecular Diagnostics testing products for coronavirus. The company’s top-line has also gained momentum, primarily due to higher production and robust worldwide demand for its two SARS-CoV-2 assays. Given the persistent proliferate of the COVID-19 virus, this impetus is expected to continue in the days ahead.

The company remains on track to ship a large volume of COVID-19 tests to customers. This trend is expected to continue as the demand for testing needs is increasing on an everyday basis, thus making substantial support to the top-line growth of the company. Further, the company expects to boost its revenues, given the high acceptance of Aptima HPV tests and Aptima HIV-1 Quant, and HCV Quant Dx, post receiving FDA approval. Coming to the Breast Health segment, the company expects to witness better-than-expected growth despite the pandemic-led challenges. Given the company’s continuing efforts to expand the business across the patient range of care along with the launch of its U.S. commercial Genius AI detection technology in December 2020, HOLX expects the same to contribute towards its top-line growth.

In January 2021, the company unveiled SuperSonic MACH 20 ultrasound system, thus expanding its ultrasound portfolio. In the same month, the company revealed the availability of 3D ultrasound imaging on the SuperSonic MACH 30 and 20 ultrasound systems in the European market. These innovations are expected to increase the company’s strong customer adoption and are likely to push segmental revenues, going forward.

Looking at the past performance over the period of FY16-FY20, the company reported a CAGR of ~7.5% and ~35.5% in total revenues and net income, respectively, with continuous upward progress. The below trend has been strongly backed by robust demand for its products along with positive cash flow from operations.

Key Trend (Source: Company Reports)

2QFY21 Key Highlights: During the quarter, the company reported adjusted earnings per share (EPS) of $2.59, depicting a rise of 354.4% from the prior corresponding period. On a GAAP basis, the company’s EPS increased from 36 cents reported in the year-ago period to $2.38 per share in 2QFY21. Revenues for 2QFY21 came in at $1.54 billion, representing an increase of 103.4% on pcp. Notably, on constant exchange rate or CER revenues went up ~98.7% year over year. Organic revenues during the quarter came in at $1.52 billion, up 104.7% on pcp. Revenues from the U.S. and internationally stood at 85.1% and 161.4%, respectively, year over year.

During the quarter, the company reported adjusted gross margin of 75%, which expanded 1,400 basis points year over year, benefitting from sales of SARS-CoV-2 tests. Adjusted operating expenses increased 24.8% on pcp, whereas adjusted operating margin increased 2,540 basis points year over year and came in at 56.9%.

Key Highlights (Source: Company Reports)

Key Metrics, Liquidity & Balance Sheet Details: The company exited the quarter, with cash balance of $816.4 million, with long-term debt amounting to ~$2.67 billion. Net cash inflow from operating activities for the six months ended March 27, 2021 came in at $1.20 billion, up from $231.6 million at the prior corresponding period.

In 2QFY21, Gross, operating, EBITDA and net margins stood at 70.6%, 51.8%, 57.2% and 40.3%, higher than the industry median of 67.8%, 9.3%, 15.3% and 4.4%, respectively. In 2QFY21, ROE stood at 17.6%, higher than the industry median of 1.6%. Debt to equity multiple in the same time span stood at 0.73x, lower than the 1QFY21 figure of 0.85x.

Liquidity and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group 

HOLX to Acquire Mobidiag: On 8 April 2021, the company inked a deal to buy Mobidiag Oy, a privately held Finnish-French biotechnology company for an enterprise value of ~$795 million. This move is expected to bolster Hologic’s diagnostics business and hasten growth post-COVID period. The company expects to close the deal in early 4QFY21, subject to the customary closing conditions. The company expects the buyout to be dilutive to its adjusted EPS by ~10 cents in FY22, and marginally dilutive in FY23, and then accretive thereafter. The buyout will aid the company to grow into the fast-growing acute care adjacency, thus fortifying its international facilities and diagnostics businesses.

Top 10 Shareholders: The top 10 shareholders together form around 55.93% of the total shareholdings, while the Top 4 constitutes the maximum holding. T. Rowe Price Associates, Inc. and The Vanguard Group, Inc. are holding a maximum stake in the company at 15.24% and 10.69%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

Risk Analysis: The company’s business, financial, and operating conditions highly depend on general economic conditions and spending powers of customers. If such circumstances worsen, it may negatively impact the overall financial performance of the company. Further, weaker-than-expected worldwide revenue in the Skeletal Health segment remains a potential headwind. Moreover, post the vaccine roll-out, sales of COVID-19 tests in the United States are expected to gradually fall, which might weigh on the company’s top-line performance. HOLX’s leveraged balance sheet also poses risks with long-term debt of $2.67 billion and cash balance of only $816.4 million as of March 27, 2021. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile. Also, rising expenses may weigh on company’s financial performance, going forward. 

Outlook: The company remains on track to bolster its position in the international market, owing to COVID-19 tests and the ongoing recovery of its other divisions. For 3QFY21, the company expects revenues to be in the range of $1 billion to $1.07 million, depicting a growth rate of 21.5% to 30%. EPS on adjusted basis is expected to be in the range of $1.00 to $1.15, depicting an increase of 33.3% to 53.3% on a year over year basis. Going forward, the company expects Diagnostic revenues to witness growth, led by an improvement in the company’s Molecular Diagnostics revenues. Strong demand for the company’s COVID-19-related products, further instils investors’ confidence. Recently, the company completed the acquisition of Diagenode, Biotheranostics and SOMATEX Medical Technologies GmbH. The acquisitions offer exceptional new platform for growth, which is expected to generate long-term value in the coming years.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last six months, the stock went down by ~11.18%. The stock made a 52-week low and high of $49.19 and $85.00, respectively. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at some discount as compared to its peer’s average a leverage balance sheet, increased investment in R&D, challenging global environment, stringent regulatory requirements, and changing customer preference. We have taken peers like Qiagen NV (NYSE: QGEN), Boston Scientific Corp (NYSE: BSX), to name a few.  Considering the company’s decent 2QFY21 performance, geographical expansion, encouraging outlook, acquisition synergies, robust product adoption and valuation, we give a “Buy” recommendation on the stock at the closing price of $65.50, down by ~0.64% on 5 May 2021.  

HOLX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.