Hologic Stock Is Up 145% Off The Recent Bottom But The Rally May Continue

HOLX: Hologic logo
HOLX
Hologic

Despite almost a 145% rise in the stock price of  Hologic (NASDAQ:HOLX), since the March lows of this year, at the current price of around $70 per share, we believe HOLX stock has more room for growth. Hologic is best known for its medical devices for diagnostics, surgery, and medical imaging, and HOLX stock has rallied from $29 to $71 off the recent bottom, significantly outperforming the S&P which moved 52%. Hologic stock is also up 65% from levels seen in early 2018, two years ago.

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, along with a 4% decline in total shares outstanding due to share repurchases. Higher revenues and lower shares meant that revenue per share grew 14% from $10.93 to $12.50. Given the growth in revenue per share, the company’s P/S multiple has also expanded. We believe the stock is likely to see more upside despite the recent uptick. Our dashboard, ‘What Factors Drove 65% Change in Hologic Stock between 2017 and now?‘, has the underlying numbers.

Hologic’s P/S multiple changed from 3.9x in 2017 to 4.2x in 2019. While the company’s P/S is 5.7x now, there is a potential upside, given the uptick seen in the company’s revenues in this year.

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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 shipped 13 million Covid tests as of fiscal Q3 that ended in June. The coronavirus testing is expected to remain high across the globe in the coming months, which will bolster Hologic’s revenue growth, especially now that the US FDA has approved Hologic’s Covid-19 test for asymptomatic individuals.

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.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. 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 become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

The company’s expected revenues for fiscal 2021 now stand at $4.3 billion, reflecting a 28% growth over the 2019 figure of $3.4 billion. Assuming no changes to shares outstanding of 260 million means revenue per share of $16.53. At the current market price of $71, HOLX stock is trading at 4.3x its 2021 estimated revenues, in-line with the levels seen over the recent years. That said, now that the company’s installed base is growing at a faster pace and it will likely result in increased recurring revenues over the coming years, investors may assign a higher valuation multiple for Hologic going forward, resulting in an upside to the stock.

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