It's frankly more difficult to find overvalued health care stocks today than undervalued ones, assuming that the market can transition through this dry spell and that procedure volumes pick up with an eventual economic recovery. Given that Hologic (Nasdaq:HOLX) serves markets largely seen as mature, many investors question whether the company can grow fast enough to be worthwhile. Although that is a legitimate concern, investors have become pessimistic to a point where even modest growth could lead to a strong rebound in the stock.

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A Respectable End to the Year
Hologic's business is a combination of solid higher-growth businesses and some smaller, more sluggish operations. Overall growth rose 9% this quarter, with breast health and diagnostics up 11 and 12% respectively, while the surgical and skeletal health businesses grew 1 and 2%. Given that this is still a pretty unhealthy market for capital equipment and doctor office visits, these are pretty solid results. (For related reading on heath care, see How To Avoid Medical Debt.)

On the profitability side, Hologic did OK, but less well. There are a couple of different ways to calculate Hologic's gross margin (depending on whether an investor wants to factor in all of the amortization), but the company posted a half-point (or better) improvement in gross margin either way. Further down the line, adjusted operating income rose 7% as the company swallowed some higher acquisition integration costs and costs tied to a direct marketing campaign for its NovaSure product.

Tomo Starting Strong
Hologic has long been counting on advanced technology (tomosynthesis) to help it stand out better from General Electric (NYSE:GE) and Siemens (NYSE:SI) in the mammography market. So far, it seems to be going well, as the company is seeing surprisingly strong acceptance. Better still, reimbursement for procedures using the new equipment has been favorable, though any investor familiar with service companies like Lincare (Nasdaq:LNCR) or even other device companies like Stryker (NYSE:SYK) can attest to how reimbursement can change quickly.

Can Hologic Maintain Diagnostics Growth?
It was encouraging to see 16% volume growth in the company's ThinPrep diagnostics product. That said, this is a market that is getting more and more crowded. Abbott (NYSE:ABT), Becton Dickinson (NYSE:BDX), Qiagen (Nasdaq:QGEN) and Siemens all want a piece of this lucrative recurrent market, and Gen-Probe (Nasdaq:GPRO) is coming out with a new product of its own. Making matters worse, there's conflicting guidance on just how often women need certain routine tests and confusion could stall market growth.

Moving Abroad
To management's credit, Hologic has been positioning itself for more overseas growth. It is certainly true that there are still many women in developed countries that do not get routine mammograms or gynecological tests, but that pales in comparison to the under-penetration of emerging markets (where, in many cases, some people never see a doctor for routine care). As countries like China, India, and Brazil develop and improve their health care systems, this should become a sizable growth opportunity.

The Bottom Line
There's plenty already out there on the poor state of routine health care procedure volumes, and it affects both Hologic and its competitors like Johnson & Johnson (NYSE:JNJ), Bard (NYSE:BCR) and Abbott. It is not at all likely to be a permanent situation, though. If the economy improves and unemployment goes back to a more historically normal level, it stands to reason that health care utilization will rebound. In the meantime, Hologic has a growing overseas business and the opportunity to do more deals in the meantime.

If Hologic can deliver mid-single-digit revenue growth and gradual margin improvement, the stock is under-priced to a meaningful degree. The Street would no doubt like to see more obvious growth market opportunities for Hologic, but patient investors could well be rewarded with the as-is business at this women's health specialist. (For related reading, see Investing In The Healthcare Sector.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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