Tickers in this Article: HOLX, GE, SI, PHG, JNJ, BDX, CPTS
While a nervous stock market may be looking for safe places to wait out the economic turbulence in the world, health care does not look like that sort of safe haven these days. Hospitals are spending more than they were a year or two ago, but it is not as though purse strings are uniformly loose. Likewise, while most people still have jobs and continue to see their doctors, enough people have lost jobs or insurance coverage to make an impact on the volumes of health care companies that depend on routine visits. Hologic (Nasdaq:HOLX) is all about routine care (with a capital equipment kicker) and while this remains an attractive franchise, momentum is still soft.

TUTORIAL: Economic Indicators To Know Slow Progress in the Third Quarter
Hologic beat the top end of the analyst range for third quarter revenue, but 7% sales growth is still not likely to get investors too excited. GYN Surgery was a growth leader at nearly 11%, but Hologic's largest unit (Breast Health) was up better than 8% as well. Diagnostics and skeletal health were both up in the low single digits.

Margins were a mixed bag. Gross margin rose 170 basis points due to a better mix of service revenue in the quarter, as well as increased tomo sales. Operating income performance is a little more mixed, though. For starters, there is a sizable slug of amortization expense in Hologic's report. Marketing expenses were definitely up more than sales, though, as were other "core" operating expenses. Whatever metric an investor uses for operating margin, then, shows year-on-year erosion.

Tomo Tomorrow?
Individual investors often wonder why health care stocks often trade down after a significant FDA approval. Hologic offers a partial explanation, as sales of the long-awaited tomo mammography product have yet to be a major contributor to earnings and profits.

There were limited tomo sales (or upgrades) this quarter, as this is still relatively expensive equipment for a buyer and this is an environment that encourages holding off on nonessential equipment upgrades. That said, it should still be an important contributor to Hologic's results - provided General Electric (NYSE:GE), Siemens (NYSE:SI) and/or Philips (NYSE:PHG) don't steal the company's thunder or find an easier FDA pathway (and erode Hologic's time-to-market advantage).

A Slower Core
All in all, volume did not look great at Hologic, but that is not especially surprising. Other companies in the biopsy space like Johnson & Johnson (NYSE:JNJ) and Bard (NYSE:BCR) saw fairly sluggish volume this quarter too. Likewise, Hologic didn't blow anybody away with momentum in diagnostics, but neither has Becton Dickinson (NYSE:BDX), Gen-Probe (Nasdaq:GPRO) or Qiagen (Nasdaq:QGEN).

There are some bright spots, though. Adiana unit volume picked up in the double digits and the company seems to be gaining some market traction on Conceptus (Nasdaq:CPTS). Likewise, NovaSure volume seems to be picking up in response to a direct marketing campaign (which was part of the reason marketing expenses were up). Last and not least, molecular diagnostics revenue jumped 4.4% for Hologic this quarter - a strong sign that the company should stay in the game with the likes of Abbott (NYSE:ABT), Becton, and Gen-Probe as diagnostics move towards MDx.

The Bottom Line
Absent occasional production transition cycles (like the 3D tomo in breast health), there is likely not huge revenue growth potential in Hologic's North American business without some sort of expansion into new markets. Emerging markets could be a different story, though, and the company's acquisition of a Chinese distributor is a solid move in that direction. Sure, there will be competition (perhaps China Medical Technologies (Nasdaq:CMED) will try to move into the gynecological diagnostics space), but Hologic has held its own against some significant competitors already.

Hologic shares are a borderline value right now - in that tricky grey area be between good hold and potential buy. Admittedly, the company's balance sheet and returns on capital don't make Hologic look like a great company, but this is a case where there's more than meets the eye. There are some better ideas out there today, but Hologic is definitely worth a serious look at today's prices. (So you've finally decided to start investing, but what should you put in your portfolio? Find out here. See How To Pick A Stock.)

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