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Hologic (HOLX) Q3 Results Review: How to Play the Stock Now?
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Women’s health innovator, Hologic (HOLX - Free Report) , reported third-quarter fiscal 2024 results on Jul 29 after market close. Revenues exceeded both the company’s internal forecasts and the Zacks Consensus Estimate. The bottom line topped the consensus mark, although the extent of surprise lowered by nearly 37% than the previous quarter. Additionally, the ongoing supply headwinds in the company’s Skeletal Health business factored into narrowed EPS guidance for the year.
Following the earnings release, the stock rose 1.1% to $83.39 at yesterday’s close. Let’s briefly go through Hologic’s performance in the third quarter.
A Glance at Q3 Performance
Top-Line Growth Returns, EPS Rises Y/Y: After 11 quarters of COVID-19-driven declines, Hologic posted 2.7% year-over-year growth, topping the Zacks Consensus Estimate by 1.1%. Adjusted earnings per share (EPS) of $1.06 beat the consensus mark by 3.9%. The company has now topped the consensus estimate for earnings for the fourth consecutive quarter.
Molecular Diagnostics Solid, Cytology Stumbles: In the fiscal third quarter, the Diagnostics segment grew 6% worldwide (excluding COVID-19 assay and related revenues), led by a 10.5% surge in Molecular Diagnostics. Panther's installed base surpassed more than 3300 systems globally. However, Cytology and Perinatal declined 2.9% globally, mainly from last year’s elevated sales due to third-party shipping constraints in the United States.
Breast Health and Surgical Franchises Thrive: The Breast Health business posted a 7.1% increase in the third quarter, largely due to increased gantry shipments and robust service business revenues. Hologic strengthened its supply chain, having effectively navigated the chip shortage challenges. Surgical sales surged 6.2%, driven by MyoSure and the related Fluent Fluid Management system, with notable contributions from the Laparoscopic product line. Internationally, the business prospered with close to 20% growth.
Cost Discipline Aids: In the fiscal third quarter, Hologic reported a 30-basis point (bps) year-over-year improvement in the gross margin, mainly driven by a favorable product mix. The operating margin of 31.2% was driven by top-line growth, expanding gross margins and lower operating expenses.
Robust Cash Position: At the third quarter-end, the company had $2.4 billion in cash and cash equivalents. Cash generated from operating activities was $400 million, totaling $918.2 million on a cumulative basis. An additional $100 million was deployed to repurchase 1.4 million shares.
Full-Year Outlook Trimmed: Management narrowed the 2024 revenue guidance to $4,012 - $4,027 billion, reflecting a $5 million reduction in the midpoint (due to a $20 million headwind related to the temporary Skeletal Health stop ship). This was partially offset by a solid third-quarter performance and anticipated $4-$5 million of revenues from the Endomagnetics acquisition. Also, EPS is now expected between $4.04 and $4.11.
Although a single quarter’s performance can influence investors’ sentiments, the company’s strengths across its multi-faceted businesses cannot be overlooked.
Promising Potential
Impressively, Hologic’s latest numbers signaled a strong return to growth, which helped ease investors’ concerns about the business’ durability after pandemic disruptions and through the global chip shortages. The company gains from its broad diversification, having a solid footing in both the Diagnostics and Medtech space. A key aspect of its consistent growth is the strategic placement of multiple durable growth drivers into each of its businesses.
The core Molecular Diagnostics arm — continuing a strong growth trajectory in 13 of the last 15 quarters — is poised to benefit from the expanded utilization of the Panther platform. In Surgical, MyoSure is growing even faster internationally from addressing the significant need for minimally invasive solutions. With robust demand for its Breast Health portfolio products and strong visibility into gantry orders, Hologic’s confidence to deliver more gantries this year than previous is high.
However, to enhance growth, Hologic combines its internal developments and external innovation across the core franchises, as exemplified by the recent addition of Endomag. A U.K.-based leader in breast cancer surgery technologies, Endomag’s cutting-edge solutions like the Magseed marker, the Magtrace lymphatic tracer and the Sentimag platform, and global reach can help address the growing demand in the interventional breast business.
While securing an acquisition of this magnitude (Endomag deal worth $300 million) is barely possible each quarter, Hologic plans to use the buyback strategy to accumulate cash for future lucrative purchases. The approach has been followed for the company’s successful acquisitions during COVID-19 — such as Biotheranostics, Fluent and Accesa — all of which are regarded as solid drivers now.
Stock Faces Some Concerns in the Near Term
While being growth drivers, the recent acquisitions come with a lower operating margin profile than the legacy business. Hologic’s international business is also dealing with higher supply-chain costs, primarily related to chips, as well as additional expenses from integrating new facilities. These issues are expected to be sorted by fiscal 2025. However, these may cause the company to fall slightly behind the pre-pandemic profit margins this fiscal year.
In addition, Hologic’s BioZorb product line (acquired through Focal Therapeutics in 2018) is facing regulatory challenges from the FDA’s Class I recall for the BioZorb Marker and BioZorb LP Marker devices. Despite this being more of a corrective measure rather than withdrawing the product, Hologic lowered the forecast for this group, hinting at a potential impairment in its value.
YTD Price Performance
So far this year, Hologic has risen 14.6% compared with the 1.9% growth of the industry and the S&P 500’s increase of 9.2%. The stock also outperformed peers QIAGEN (QGEN - Free Report) and Becton, Dickinson and Company (BDX - Free Report) , which plunged 0.7% and 4.6%, respectively.
YTD Price Comparison
Image Source: Zacks Investment Research
Valuation
The company’s forward 12-month P/E of 18.9X is lower than both the industry average of 31.6X and its five-year median of 33.1X.
Price-to-Earnings Forward Twelve Months (F12M)
Image Source: Zacks Investment Research
Estimate Movement
In the past 30 days, Hologic’s fiscal 2024 earnings estimate has remained constant at $4.08.
Image Source: Zacks Investment Research
Our Final Take
Hologic’s present challenges, such as supply issues in the international business and regulatory hurdles within the BioZorb product line, may prompt potential investors to take a cautious stance and seek a better entry point. However, the company’s robust fundamentals, acquisition strength, attractive valuation and stock outperformance compared to peers make it attractive for the current investors. On top of that, the impressive Q3 results should enhance the appeal of this stock. For now, we think this is a worthwhile option to hold HOLX for those who have already invested in it.
Image: Bigstock
Hologic (HOLX) Q3 Results Review: How to Play the Stock Now?
Women’s health innovator, Hologic (HOLX - Free Report) , reported third-quarter fiscal 2024 results on Jul 29 after market close. Revenues exceeded both the company’s internal forecasts and the Zacks Consensus Estimate. The bottom line topped the consensus mark, although the extent of surprise lowered by nearly 37% than the previous quarter. Additionally, the ongoing supply headwinds in the company’s Skeletal Health business factored into narrowed EPS guidance for the year.
Following the earnings release, the stock rose 1.1% to $83.39 at yesterday’s close. Let’s briefly go through Hologic’s performance in the third quarter.
A Glance at Q3 Performance
Top-Line Growth Returns, EPS Rises Y/Y: After 11 quarters of COVID-19-driven declines, Hologic posted 2.7% year-over-year growth, topping the Zacks Consensus Estimate by 1.1%. Adjusted earnings per share (EPS) of $1.06 beat the consensus mark by 3.9%. The company has now topped the consensus estimate for earnings for the fourth consecutive quarter.
Molecular Diagnostics Solid, Cytology Stumbles: In the fiscal third quarter, the Diagnostics segment grew 6% worldwide (excluding COVID-19 assay and related revenues), led by a 10.5% surge in Molecular Diagnostics. Panther's installed base surpassed more than 3300 systems globally. However, Cytology and Perinatal declined 2.9% globally, mainly from last year’s elevated sales due to third-party shipping constraints in the United States.
Breast Health and Surgical Franchises Thrive: The Breast Health business posted a 7.1% increase in the third quarter, largely due to increased gantry shipments and robust service business revenues. Hologic strengthened its supply chain, having effectively navigated the chip shortage challenges. Surgical sales surged 6.2%, driven by MyoSure and the related Fluent Fluid Management system, with notable contributions from the Laparoscopic product line. Internationally, the business prospered with close to 20% growth.
Cost Discipline Aids: In the fiscal third quarter, Hologic reported a 30-basis point (bps) year-over-year improvement in the gross margin, mainly driven by a favorable product mix. The operating margin of 31.2% was driven by top-line growth, expanding gross margins and lower operating expenses.
Robust Cash Position: At the third quarter-end, the company had $2.4 billion in cash and cash equivalents. Cash generated from operating activities was $400 million, totaling $918.2 million on a cumulative basis. An additional $100 million was deployed to repurchase 1.4 million shares.
Full-Year Outlook Trimmed: Management narrowed the 2024 revenue guidance to $4,012 - $4,027 billion, reflecting a $5 million reduction in the midpoint (due to a $20 million headwind related to the temporary Skeletal Health stop ship). This was partially offset by a solid third-quarter performance and anticipated $4-$5 million of revenues from the Endomagnetics acquisition. Also, EPS is now expected between $4.04 and $4.11.
Although a single quarter’s performance can influence investors’ sentiments, the company’s strengths across its multi-faceted businesses cannot be overlooked.
Promising Potential
Impressively, Hologic’s latest numbers signaled a strong return to growth, which helped ease investors’ concerns about the business’ durability after pandemic disruptions and through the global chip shortages. The company gains from its broad diversification, having a solid footing in both the Diagnostics and Medtech space. A key aspect of its consistent growth is the strategic placement of multiple durable growth drivers into each of its businesses.
The core Molecular Diagnostics arm — continuing a strong growth trajectory in 13 of the last 15 quarters — is poised to benefit from the expanded utilization of the Panther platform. In Surgical, MyoSure is growing even faster internationally from addressing the significant need for minimally invasive solutions. With robust demand for its Breast Health portfolio products and strong visibility into gantry orders, Hologic’s confidence to deliver more gantries this year than previous is high.
However, to enhance growth, Hologic combines its internal developments and external innovation across the core franchises, as exemplified by the recent addition of Endomag. A U.K.-based leader in breast cancer surgery technologies, Endomag’s cutting-edge solutions like the Magseed marker, the Magtrace lymphatic tracer and the Sentimag platform, and global reach can help address the growing demand in the interventional breast business.
While securing an acquisition of this magnitude (Endomag deal worth $300 million) is barely possible each quarter, Hologic plans to use the buyback strategy to accumulate cash for future lucrative purchases. The approach has been followed for the company’s successful acquisitions during COVID-19 — such as Biotheranostics, Fluent and Accesa — all of which are regarded as solid drivers now.
Stock Faces Some Concerns in the Near Term
While being growth drivers, the recent acquisitions come with a lower operating margin profile than the legacy business. Hologic’s international business is also dealing with higher supply-chain costs, primarily related to chips, as well as additional expenses from integrating new facilities. These issues are expected to be sorted by fiscal 2025. However, these may cause the company to fall slightly behind the pre-pandemic profit margins this fiscal year.
In addition, Hologic’s BioZorb product line (acquired through Focal Therapeutics in 2018) is facing regulatory challenges from the FDA’s Class I recall for the BioZorb Marker and BioZorb LP Marker devices. Despite this being more of a corrective measure rather than withdrawing the product, Hologic lowered the forecast for this group, hinting at a potential impairment in its value.
YTD Price Performance
So far this year, Hologic has risen 14.6% compared with the 1.9% growth of the industry and the S&P 500’s increase of 9.2%. The stock also outperformed peers QIAGEN (QGEN - Free Report) and Becton, Dickinson and Company (BDX - Free Report) , which plunged 0.7% and 4.6%, respectively.
YTD Price Comparison
Image Source: Zacks Investment Research
Valuation
The company’s forward 12-month P/E of 18.9X is lower than both the industry average of 31.6X and its five-year median of 33.1X.
Price-to-Earnings Forward Twelve Months (F12M)
Image Source: Zacks Investment Research
Estimate Movement
In the past 30 days, Hologic’s fiscal 2024 earnings estimate has remained constant at $4.08.
Image Source: Zacks Investment Research
Our Final Take
Hologic’s present challenges, such as supply issues in the international business and regulatory hurdles within the BioZorb product line, may prompt potential investors to take a cautious stance and seek a better entry point. However, the company’s robust fundamentals, acquisition strength, attractive valuation and stock outperformance compared to peers make it attractive for the current investors. On top of that, the impressive Q3 results should enhance the appeal of this stock. For now, we think this is a worthwhile option to hold HOLX for those who have already invested in it.
Hologic currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.