Buy, Sell, Or Hold Hologic Stock At $57?

Although rising 90% since the March 23 lows of this year, at the current price of around $57 per share we believe the stock price of Hologic (NASDAQ:HOLX), best known for its medical devices for diagnostics, surgery, and medical imaging, still has potential upside. Hologic stock has rallied from $29 to $57 off the recent bottom, significantly outperforming the S&P which moved 39%. Hologic stock is also up 33% from levels seen in early 2018, two years ago.

Hologic stock has fully recovered, and it is now trading 7% above the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential primarily led by its Covid-19 tests.

Some of this rise of the last 2 years is justified by the roughly 10% growth seen in Hologic’s revenues from 2017 to 2019, which translated into a slight growth in Net Income Margins. Given the company’s steady revenue and earnings growth over recent years, its PE multiple has also expanded. Hologic’s PE multiple increased from 21.1x in 2017 to 21.5x in 2019. While the company’s PE is now 23.5x, higher than the levels seen in recent years, it could expand further as the demand for coronavirus testing remains high in the near term. We believe the stock is likely to see more upside despite the recent rally. Our dashboard, ‘What Factors Drove 33% Change in Hologic Stock between 2017 and now?‘, has the underlying numbers.

So what’s the likely trigger and timing for further upside?

The global spread of Coronavirus has meant an increased demand for testing, which bodes well for Hologic, given that the U.S. FDA granted an emergency use authorization (EUA) for Hologic’s Panther Fusion SARS-CoV-2 to detect coronavirus. This is important given the rise in cases in the U.S. The company expects to produce around 1 million tests per week. The coronavirus testing is expected to remain high across the globe in the coming months, which will bolster Hologic’s revenue growth. We believe Hologic’s fiscal Q3 results will confirm the growth in its adjusted revenue (adjusting for Cynosure divestiture).

By the time the coronavirus threat abates, the company’s installed base would have increased meaningfully. The company aims at placing 500 Panther systems this year, compared to over 200 systems it placed annually over the last 5 years. As such, labs will continue to use the Panther systems for other tests, once the demand for Covid-19 tests fade. The higher the installed base, the higher will be the demand for services, which currently accounts for 18% of the company’s total revenues.

Additionally, the company has divested its underperforming medical aesthetics business, Cynosure. This will likely result in improved margins going forward. As lockdowns are lifted then investors could begin to focus on the company’s performance in 2021 and onward – potentially driving Hologic stock higher over the coming months.

We expect the near future to bring continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. which will aid market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

While Hologic stock looks like it can gain more, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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