The Good Brigade
In February, I believed that shares of Hologic, Inc. (NASDAQ:HOLX) were starting to look a bit more attractive as headwinds were disappearing. The women's health business benefited greatly from the pandemic (through its diagnostics business) yet the subsequent headwinds are ending in 2024.
This improves the prospects for growth as appeal was slowly emerging, with year-over-year growth appearing in the coming quarters. All this looks quite compelling amidst a strong balance sheet, solid track record, continued M&A, as well as a reasonable valuation. Amidst these observations, I am happy to hold a position here, fully anticipating a valuation re-rating over time.
Women's Health
Hologic aims to elevate women's health across the globe, as over time it has become a $4 billion business. A substantial diagnostics business makes up for nearly half of sales, complemented by a near 40% breast and skeletal division, with some 15% of sales generated from surgical applications.
About two-thirds of sales are generated from consumables, with the remaining revenues split between services as well as capital investments. Some three quarters of sales are generated in the US, despite a focus on international growth.
In evaluating the past, it is important to understand the boom induced by the pandemic. The core business grew sales from $2.5 billion in 2014 to a peak of $5.6 billion in 2021. This came after the company saw a >$2 billion COVID-19 diagnostic revenue contribution that year to the results, as the reversal of these revenues made that revenues fell to $4.0 billion in 2023.
Over this decade long period, the company grew earnings from about $1.50 per share in 2014 to $4 per share in 2023, but this came after earnings peaked at $8 per share in 2021. This recent decline of course relates to the reversal of the lucrative COVID-19 diagnostics sales. Theses excessive earnings were used to deleverage the balance sheet completely. After operating with a high 4 times leverage ratio a decade ago, the company has returned to operate with a rather flattish net debt load here.
Picking Up The Valuation Discussions
In November of last year, the company posted a 17% fall in full-year sales to $4.03 billion, with fourth quarter sales down a percent to $945 million. Adjusted earnings came in at $3.96 per share, but this was after no less than 15 earnings adjustments have been made, with GAAP earnings reported at $1.83 per share. To be fair, the vast majority of the reconciliation relates to amortization charges, which I am happy to adjust for.
The company operated with a modest net debt load of $96 million, but this was actually comprised out of large absolute cash and debt levels, each around $2.8 billion. This was actually a good thing, with the company obtaining net interest income on these balances.
Looking Forward
The company guided for 2024 earnings between $3.90 and $4.10 per share, which frankly feels a bit soft, up just four cents on the year before. This comes as the worst pandemic headwinds were disappearing, as the company furthermore announced a $500 million share buyback program, which in isolation is enough to explain the anticipated earnings per share growth.
This was certainly the case as the company guided for organic sales to grow by 5-7%, although that total sales are still seen down a bit to $3.96 billion, due to the impact of declining pandemic related diagnostics sales.
Trading at $73 in February, the company was valued at $18 billion, equal to 4.5 times sales and 18 times earnings, which for an unleveraged business with mid-single digit organic growth looks quite reasonable, and even appealing.
This was certainly the case after the company hiked the midpoint of the full year sales guidance to $4.02 billion, with earnings now seen at $4.04 per share upon the release of the first quarter results in February. The company took on $627 million in net debt to finance share buybacks, apparently as a lack of real M&A opportunities was found.
Stuck In The Seventies
Since February, shares of Hologic have been tied around the $75 mark, as shares have shown remarkably little volatility. Late in April, Hologic announced a $310 million deal to acquire Endomagnetics, a privately-held breast cancer surgery technology business.
The UK-based firm develops and sells breast surgery localization and lymphatic tracing technologies and generates about $35 million in sales in 2023, revealing that a near 10 times sales multiple has been paid. The deal is expected to be slightly dilutive to earnings per share in 2024, although that this has not been quantified. A break-even contribution to the bottom line is seen in 2025, and accretion is seen thereafter.
Early in May, Hologic reported a near 1% fall in second quarter sales to $1.02 billion with pandemic related revenues running off, while organic growth comes in close to 5%. The company witnessed some margin contraction, with adjusted earnings down three cents to $1.03 per share. The company largely reconfirmed the full-year guidance, now seeing sales at a midpoint of $4.025 billion, with adjusted earnings seen at $4.07 per share.
Net debt was reported at $371 million, a net debt load which will increase to $681 million if we factor in the purchase price of Endomagnetics, a deal set to bolster pro forma sales by around a percent here. The diluted share count reduces the share count to 237 million shares, for an equity valuation just trailing the $18 billion mark.
And Now?
With the company posting $3.6 billion in sales excluding the COVID-19 contribution, the headwinds are disappearing rapidly. From the current third quarter onwards, the company would see real organic growth as the headwinds from these revenues on their retreat are no longer visible. Second quarter COVID-19 related revenues in the year 2023 still totaled $98 million, but these fell to $55 million in the third quarter of 2023 (and actually came in at $53 million in the second quarter of 2024).
Reported sales growth from hereon should approximate organic growth in a more precise manner, as the reported sales growth could unleash some valuation expansion from a current 18-19 times earnings multiple.
Amidst all this, I am still leaning positive, fully anticipating some valuation re-rating in the upcoming period, as a return of organic growth might easily drive shares up to the $100 mark, unleashing a solid growth play into setting new record highs.
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