Summary
Hologic has seen a strong 2021 as the pandemic has been with us longer than expected and certainly hope.
While the 2022 guidance looks soft, exactly this reason will likely trigger a positive surprise.
With excess earnings used to make bolt-on deals and cut debt, I remain upbeat here.
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Noam Galai/Getty Images Entertainment At the start of the year 2021 I called Hologic (NASDAQ: HOLX ) a clear winner of the pandemic, to the extent that there are winners in such an environment. The company benefited from the pandemic, boosting earnings to a level thought not sustainable post-pandemic, but as this year continues to be dominated by the same pandemic (with no end in sight), it is obvious that some re-rating might be warranted. Former Take – Women’s Health Play
Hologic focuses on women’s health, generating $3.8 billion in sales from a wide range of products. Diagnostics is the key segment, making up more than half of sales (in normal times). This is complemented by a breast and skeletal business which makes up a third of sales and a smaller surgical business.
The company relies heavily on consumables, in fact for about two-thirds of sales, as service and capital spending on equipment make up for the remainder. The diagnostics business is very important in normal days, but certainly during the pandemic as the company offered tests as well in the fight against COVID-19. That lifted the boats in 2020 as the question was of course how long and stable that demand would be.
Given that 2020 was somewhat of an outlier, I looked at the 2019 results earlier this year. The company generated nearly $3.4 billion in sales that year, on which it reported adjusted earnings of $659 million ($2.43 per share) and GAAP losses of $40 million. The difference largely relates to impairment and goodwill charges, on the back of the divestment of the Cynosure business at a rock-bottom price. This performance was awarded a $50 valuation before the pandemic which looked reasonable.
When the pandemic arrived a lot of factors came into play, including exploding diagnostics revenues and imploding service and capital expenditure related revenues. Nonetheless, the net benefit of all this was positive as fourth quarter results (posted in November 2020) showed a 55% increase in sales to $1.35 billion. Quarterly adjusted earnings of $2.07 per share already approached all of 2019 earnings, as the company earned nearly $4 per share for the year, with the first three quarters not being impacted in the same degree.
Given the situation described above I concluded that Hologic was posting earnings close to $8 per share, while the normalized earnings power probably comes in around $2.50 per share, a huge discrepancy. That said, the huge current earnings boom was welcomed as it allows for rapid reduction of a $2.4 billion net debt load.
Pegging realistic earnings absence of Covid-19 at around $2.50-$3.00 per share, I found the valuation a bit high around the $80 mark. That said, the company made progress with FDA approval rolling in for its early breast cancer detection. While the boom in the diagnostic tests relate to the pandemic should be short-lived, at least that was the hope, the company has seen growth in other segments as well. Pegging earnings power closer to $3 per share in a non-Covid-19 world, I saw compelling value at $60-$70. What Happened In 2021?
In January, it was apparent that the business was on fire with reported sales up 89% to $1.61 billion for the quarter, with quarterly earnings of $2.86 per share surpassing the earnings reported in all of 2019!
These great results inspired confidence, not just from investors, but from the management team itself as well. In March, a $159 million bolt-on deal for Diagenode was announced . This molecular diagnostic assays and epigenetics product manufacturer was set to contribute $30 million in annual sales.
A month later, Hologic announced a $795 million deal for Finnish Mobidiag Oy. The developer of innovative molecular diagnostic tests and instruments comes at a steep price as the revenue contribution was pegged at just $42 million in 2020. This implies that accretion to earnings per share likely has to wait until 2023, yet it shows that Hologic is investing into future growth areas, using the booming earnings to do so.
Late in April, shares actually fell to $65, upon the release of the second quarter results. While revenues […]
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