Streetwise: Hologic transformed from ugly duckling into a swan
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In the story of "The Ugly Duckling" by Hans Christian Andersen, a homely little bird matures into a graceful swan. The story comes to mind once again because of Hologic Inc., a company that was an "ugly duckling" a year ago. The question is will it soon spread its wings as a graceful swan? Perhaps ... see what you think.
Hologic develops, manufactures and supplies diagnostic medical imaging systems and surgical products for the healthcare needs of women. To that end, it has become an industry giant operating in four distinct sectors of the marketplace: breast health, diagnostics, GYN surgical and skeletal health. The company currently has a market cap of $5.1 billion.
Unfortunately, while more women are having wellness exams, surgical and other more discretionary procedures are clearly feeling the brunt of the weak economy and persistent unemployment.
My non-GAAP (non-cash items removed) earnings forecast for 2012 was $1.34 per share with a 12-month target price for the shares of $22 for a potential capital gain of 23 percent.
So how did Hologic do?
Non-GAAP earnings were $1.38 per share, exceeding my estimate, while the shares closed recently at $20.47 for a 14.74 percent capital gain.
The company's corporate strengths are revenue growth, rising share value and expanding profit margins. However, deteriorating net income, disappointing return on equity and generally higher debt management risk, represent the negative side of the ledger.
The company's 2012 fourth-quarter earnings came in at 37 cents per share, while revenues increased 26 percent to $588.5 million. This, despite economic uncertainties in Europe, slower sales cycles and increased pricing pressure.
Hologic's international focus resulted in 27 percent of its revenues during the reported quarter coming from the international marketplace. Hologic has been building its international infrastructure and fortifying management resources in the emerging markets of China, Latin America, the Middle East and Eastern Europe.
The company recently acquired TCT and Healthcome Technology, both based in China. Following the acquisition of TCT, China became Hologic's largest ThinPrep (a cervical cancer diagnostic for women) market outside the United States.
For its fiscal year ended Sept. 29, revenues totaled $2 billion, an increase of 11.9 percent or 12.6 percent on a non-GAAP adjusted basis. For the same 12-month period, the company reported a net loss of 28 cents per share, as compared with a positive 59 cents per share for the comparable period a year ago.
Non-GAAP earnings increased 9.6 percent to $1.38 per share for the 12 months ended Sept. 29, as compared to $1.27 per share for the same period in the prior year.
In its guidance for the first quarter of fiscal 2013, that ended Dec. 29, Hologic is projecting non-GAAP revenues of $640 million to $645 million and non-GAAP earnings per share of 37 cents. This reflects additional expected interest expense of $45 million related to the financing of the Gen-Probe acquisition, as well as the expected seasonal increase in operating expenses related to trade shows that occur in the first quarter.
For all of fiscal 2013, the company's management is projecting non-GAAP revenues of between $2.61 billion and $2.64 billion, an increase of 30 percent to 31 percent over fiscal 2012. Non-GAAP earnings are projected at between $1.56 and $1.58 per share, again reflecting additional interest expense of $180 million related to the financing of the Gen-Probe acquisition, as well as a charge of approximately $25 million related to the medical device excise tax beginning on Jan. 1.
The intrinsic value of the shares using a discounted earnings model is not applicable due to negative GAAP earnings. However, the free cash flow to the firm model yields a result of $44 per share. My non-GAAP 2013 earnings projection is $1.60 per share, with a 12-month projected share price of $23.95, representing a capital gain of 17 percent.
So from where I sit, it appears we have a beautiful swan in the making.
First Published January 6, 2013 12:00 am