Has Hologic Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Hologic (Nasdaq: HOLX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Hologic.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

22.2%

Pass

 

1-Year Revenue Growth > 12%

7.5%

Fail

Margins

Gross Margin > 35%

63.1%

Pass

 

Net Margin > 15%

1.7%

Fail

Balance Sheet

Debt to Equity < 50%

51.3%

Fail

 

Current Ratio > 1.3

2.76

Pass

Opportunities

Return on Equity > 15%

1.1%

Fail

Valuation

Normalized P/E < 20

39.04

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Hologic last year, the company hasn't been able to improve on its three-point score. The stock, though, hasn't disappointed investors, with a nice 30% gain over the past year.

Hologic is a medical-device maker that focuses on women's health, with products including mammography imaging systems, screening tests, and bone-density measurement devices. One example of a product recently approved by the Food and Drug Administration is its APTMIA HPV assay, which operates on the company's TIGRIS system to help detect types of HPV that lead to cervical cancer.

Hologic is far from the only company that serves patients in the particular areas it has chosen. In mammography, Siemens (NYSE: SI  ) and General Electric (NYSE: GE  ) are among several companies with competing digitial mammography systems. In diagnostics, Hologic's ThinPrep product has a direct competitor in Becton Dickinson (NYSE: BDX  ) , while its clinical segment features big players including Siements, Becton, and Abbott Labs (NYSE: ABT  ) .

Overall, Hologic has been able to hold its own in the industry, but investors aren't entirely happy with Hologic's strategic moves. In late April, the company announced a buyout of diagnostic test company Gen-Probe. With Hologic paying about $3.75 billion, the purchase price represented a 20% premium to Gen-Probe's closing price immediately before the buyout. Despite assurances that the deal will add to earnings with in the first year, Hologic shareholders bid the stock down sharply after the announcement.

For Hologic to gain ground, it needs to prove to investors that earnings enhancements will result from the takeover. Once more money starts flowing in, it should convince detractors that the buyout's synergies are for real. With potential headwinds coming from a medical-device tax, though, it's hard to see Hologic making much ground in the immediate future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

GE is certainly trying to gain ground in women's health. But does that make General Electric a buy right now? Find out in our premium report on GE, in which our industrials analyst breaks down the conglomerate's multiple businesses. You'll find reasons to buy or sell GE, and you'll receive continuing updates as major events unfold during the year. To get started, click here now.

Click here to add Hologic to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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