February 15, 2021 BARRON’S 15
at 36%. Now, diagnostics has grown to
56% of revenue, while Breast Health
has slipped to second, at 30%. GYN
Surgical, the third-largest segment,
is 10%, down from 13% in fiscal 2019.
Hologic is expected to post total
sales of $5.8 billion in fiscal 2021, up
53% year over year.
Hologic currently trades for just
under nine times fiscal-2021 estimated
earnings of $8.95 a share, compared
with its five-year average of nearly 19
times earnings. Larger Covid-19-test
providers, such asThermo Fisher
Scientific(TMO) andAbbott Labo-
ratories(ABT), fetch 23 and 25 times
earnings, respectively, although
Covid-19-test supplies are a much
smaller part of their businesses.
By some estimates, the Covid-
diagnostics business could fall by 35%
in the next year, which helps explain
Hologic’s steep discount. But Jefferies
analyst Raj Denhoy thinks those con-
cerns are overblown. Even with the
vaccine rollouts, extensive testing may
still be needed before surgery and
travel, and around adoption of the vac-
cine. “The downward trajectory next
year isn’t going to be as bad as people
feared,” he says. “Covid testing proba-
bly will continue for quite some time.”
Besides, Hologic is more than just
a bet on Covid-19 testing. Its growing
diagnostic business has allowed it to
place more of its devices in labs and
hospitals around the country, and they
are likely to stay there, especially be-
cause its automated testing is simpler
than mixing and matching products
from different companies. As a result,
Hologic is well positioned to emerge in
the postpandemic world with a larger
market share in the broader molecular-
diagnosis industry. That should help to
offset any falloff in Covid-19-related
revenue in years to come, says Wells
Fargo analyst Dan Leonard.
Hologic is known as one of the larg-
est players in breast-imaging technolo-
gies such as mammography. It also sells
other medical devices used in gyneco-
logic surgeries, biopsies, and other pro-
cedures. Those businesses were hurt
last year, as fewer people had regular
checkups or nonurgent procedures.
But they recovered to prepandemic
levels in the December quarter, bring-
ing in total revenue of $482 million.
Things may only get better. “We
expect to have a very good year in 2021
based on our contributions to Covid
testing, as well as the continued recov-
ery of our breast health, surgical, and
broader diagnostics franchises that
benefit women’s health,” says Steve
MacMillan, Hologic’s chairman, presi-
dent, and CEO.
With the tailwind of Covid-19 test-
ing and a recovery in other business
segments, Wall Street expects Hologic’s
earnings to grow by 125% in fiscal
2021—and that’s atop a 64% gain, to
$3.98 per share, in fiscal 2020. “They
are going to be a strong beneficiary of
the Covid-19 situation as well as the
post-Covid environment,” says Ken
Laudan, co-manager of the $1.9 billion
Buffalo Discoveryfund (BUFTX),
which counts Hologic among its top
holdings. “You have a business that
would be hitting on all cylinders.”
C
ovid-19 has done wonders for
Hologic’s cash flow. Laudan esti-
mates that the company proba-
bly will generate $1.5 billion to
$1.8 billion of free cash flow due to the
Covid-19 opportunity. Denhoy is even
more optimistic, predicting $2.5 billion
to $3 billion in free cash from “insatia-
ble Covid demand” over the next two
years. That’s money that can be put to
use for reinvestment, mergers and ac-
quisitions, and stock buybacks. Hologic
is planning to do all of that.
Hologic, which sports a market
capitalization of $20.5 billion, repur-
chased 1.5 million of its shares—worth
about $101 million—during the De-
cember quarter. The company just
announced a $1 billion stock-repur-
chase authorization over the next five
years. If it chooses to execute that en-
tire buyback program, the total num-
ber of shares could be reduced by 5%.
Hologic is also looking to expand
its business portfolio through acquisi-
tions. It announced the purchase of
two small firms in January—Biothera-
nostics, in molecular oncology diagnos-
tics, and Somatex Medical Technolo-
gies, one of its suppliers in Germany.
These deals seem to be a precursor to
further transactions. On its latest earn-
ings call two weeks ago, Hologic man-
agement said the company is pursuing
a number of acquisitions and hopes to
complete more deals this year.
One way or the other, Hologic will
keep growing, and don’t be surprised if
its valuation grows, too. At about 11
times 2021 earnings estimates, it would
be worth $95, Leonard’s price target—
up 11% from Thursday’s close. At 12
times earnings, the stock would be
worth $106, Denhoy’s target, up 32.5%.
Either way, Hologic passes the test.B
HologicStock
CouldPass
ThePost-
CovidTest
Shares of the Covid-test company
are cheap, and the business is
growing. Some analysts see
about 25% upside for the shares.
2021
0
20%
A Healthy Rally
Hologic should continue to outperform the
market even after the lockdowns end.
HOLXvsSPX
Hologic....................................
S&P 500
Source: FactSet
“[Hologic is]
goingtobe
a strong
beneficiary
of the Covid-
19 situation
as well as
the post-
Covid
environ-
ment.”
Ken Laudan,
Buffalo Discovery
fund
S
ometimes, you really can
have it both ways. Consider
medical-diagnostic company
Hologic,a Covid-19-benefi-
ciary but also a business
that will benefit as life
returns to normal.
To say that Covid-19 has been good
for Hologic’s (HOLX) business is an
understatement. The company, which
provides molecular diagnostic equip-
ment for Covid-19 PCR tests, saw sales
in its diagnostics division grow to
$1.1 billion during the fiscal first quar-
ter that ended in December 2020, up
from $312 million in the same quarter
of 2019, while earnings quadrupled.
The market seems reluctant to give
Marlborough, Mass.–based Hologic
credit for that growth. While its stock
has gained 52%, to $80.02, in the past
12 months, three times the S&P 500
index’s 17% rise during the same pe-
riod, its price/earnings ratio has fallen.
That’s a sign that investors expect the
boost from Covid-19 testing to fade as
the disease ebbs. Yet, the contraction in
valuation overlooks the likelihood that
testing will continue, while Hologic’s
success with the coronavirus could
lead to growth in its other businesses.
For investors, Hologic looks like a
bargain waiting to be snapped up.
Hologic was a much different com-
pany before the coronavirus arrived.
Breast Health, which provides every-
thing from screening to treatment,
accounted for 39% of sales at the end
of fiscal 2019, with diagnostics second,
By EVIE LIU
Photograph by Peter Bohler