Still Time To Buy Hologic

By Stephen D. Simpson, CFA | August 05, 2010 AAA

Maybe one of the more interesting legacies of this recession will be the demise of the popular myth that healthcare is a safe sector because people need care in good times and bad. Across the board, whether it is a capital goods-intensive company like Intuitive Surgical (Nasdaq:ISRG) or Varian (NYSE:VAR) or a more consumables-oriented company like Carefusion (NYSE:CFN) or Becton Dickinson (NYSE:BDX), companies have suffered from lower levels of hospital spending and fewer people visiting doctors.

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As a company that depends on both capital spending and routine patient visits, Hologic (Nasdaq:HOLX) has been in the middle of this riptide. True, the company has not seen nearly the sort of cyclical decline that you might expect from an industrial company, but there is enough economic uncertainty here to make investors rethink the idea that healthcare stocks are always safe.

The Quarter That Was
All things considered, the June quarter was alright for Hologic. Total revenue rose about 4% as reported and growth was closer to 6% in constant currency terms. Growth was led by the company's largest business, as breast health saw 8% revenue growth. The company's second-biggest business, diagnostics, was down more than 1% due to the aforementioned decline in patient visits and equipment spending.

The company was not quite as successful in maintaining its profitability. Gross margin slid over 200 basis points, due in part to high scrap costs with the company's Adiana product production line and unabsorbed overhead in the NovaSure production process, as well as lower volume in the lucrative ThinPrep test business. On an adjusted basis, however, operating results held up a bit better as there was 3% growth on this line.

The Road Ahead
There are several valid reasons to be optimistic about Hologic and the company's shares. First, we will eventually make our way through these tough economic times and that will mean that people once again have jobs (and health insurance) and feel that they can go visit their doctor for routine care. Moreover, however controversial the new U.S. healthcare laws may be, it should ultimately result in more people seeking out routine care - something that should be a boon for a diagnostics company like Hologic.

Beyond that, there should also be a pick-up in capital equipment sales as the economy gets better. Hologic will have a meeting with the FDA relatively soon about its new tomosynthesis system and approval of this product should give a boost to the company's system sales. Looking further ahead, the company still sells relatively little of its products overseas and expanding this segment of its business should be a priority in the coming years. (For more, see Investing In Medical Equiptment Companies.)

The Bottom Line
Even though Hologic still has to fend off the likes of General Electric (NYSE:GE), Siemens (NYSE:SI), and Becton Dickinson on a day-to-day basis, and even though I am not all that optimistic about the company's Adiana product, I think there are plenty of good reasons to hold this stock.

However, it seems like investors are somewhat spoiled for choice in the healthcare space. The sector has cheap stocks in devices, diagnostics, pharmaceuticals, generics and biotech. Given that Hologic's future growth looks as though it will be more than order of high single-digits, maybe the stock gets left behind in lieu of more exciting ideas. For patient investors, though, Hologic shares are worth some further due diligence. (For more, see 7 Hot Medical Device Ideas.)

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