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Hologic Is Trading Near Its All-Time High. Is It Still a Good Buy?

By Jim Halley – May 28, 2020 at 1:48AM

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The company's COVID-19 testing platform is just part of the reason for the stock's jump.

Hologic (HOLX 1.64%), after earning an emergency use authorization (EUA) for a second COVID-19 molecular test from the Food and Drug Administration on May 15, is trading just a few dollars off its all-time high of $55.25, set on Feb. 4. The question for the Marlborough, Mass. medical technology company, and for investors, is whether its stock can continue to rise.

Man and woman in lab coats, performing tests in a lab.


The EUA is a big deal, no question

COVID-19 testing is a key part of getting workplaces back to being fully staffed in the coming months. The company, which has more than 6,000 employees, said it expects to produce an average of 1 million molecular COVID-19 tests per week. Its test runs on Hologic's Panther system, an existing platform already being used in approximately 750 U.S. hospitals and labs. The company says the system can provide results in roughly three hours and can process more than 1,000 coronavirus tests in 24 hours. 

"Delivering test results when and where they are needed -- so people can either get back to work or quarantine themselves -- is key to reopening global economies safely," said Steve MacMillan, the company's chairman, president, and CEO. 

To help develop the test, the company received $699,000 in funding from a division of the U.S. Department of Health and Human Services (HHS) called the Biomedical Advanced Research and Development Authority (BARDA).

"Early, rapid diagnosis is essential for clinicians and their patients to treat infections appropriately and take immediate action to help mitigate the spread of COVID-19," said BARDA director Rick Bright. 

It is certainly not the only company that has developed a COVID-19 test, so investors should keep an eye on all the players involved.

Solid financials are behind the jump

The stock was already doing well, with the Hologic share price rising 21.1% throughout 2019. The company exited the first quarter with revenues up 5.7% year over year in constant currency, led by its breast health, molecular diagnostics, and GYN surgical segments. However, when COVID-19 hit, the company's stock price fell dramatically to a trough of $26.49 on March 18. Since that time, it has steadily climbed, closing at $51.10 on Tuesday.

The company has withdrawn full-year guidance because of the anticipated impact the pandemic will have on its business. It also announced layoffs and salary cuts to keep expenses down in anticipation of a business slowdown due to the pandemic.

However, the company's second-quarter numbers were enough to make investors look past those headwinds. In the quarter, Hologic had revenue of $756.1 million, down 7.6% from the same quarter in 2019, but the company's net income of $96.3 million represented a rise of 135.3% over the same period last year. 

"Hologic was performing exceptionally well until late March, continuing the strong momentum that has been building over the last few years," MacMillan said in the second-quarter conference call. "Second, as COVID-19 spread and threaten(ed) global economies, we moved quickly to mitigate the risk with a focus on cash so that our healthy fundamentals would be intact on the other side of the pandemic." 

A smart money favorite

A high percentage (96.9%) of the stock is institutionally owned, meaning that it's favored by large mutual funds, hedge funds, and private-equity firms. It's also still attractively compared to other medical equipment manufacturers, with a price-to-earnings ratio of 31.1 (compared to the industry average of 44.4).

However, there are two negatives that investors should pay attention to. First, analysts are fairly split on whether to be bullish or bearish on the stock. Two, its revenue growth rate (trailing twelve months) of 1.16% is behind the industry average. 

Hologic's diagnostics give it an edge

Overall, I'm excited about the stock's chances of going higher. While it operates in a very competitive medical sector, its focus on women's health gives it a market niche. A good example of the company's approach is its Unifi EQUIP system, which helps facilitate and correct mammogram images. The system, developed last year in a partnership with MagView, a leading mammography information solutions company, was recognized as "Best Overall MedTech Solution" in the 2020 MedTech Breakthrough Awards program. 

In addition, its coronavirus tests have gained government favor, and it's a safe bet that there will be a lot of COVID-19 tests conducted in 2020. That will help buoy the company as its other divisions begin to pick up as the pandemic subsides.

Jim Halley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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