Streetwise

Lauren Rudd

Sunday, January 6, 2013

The Ugly Duckling

In the story of “The Ugly Duckling” by Hans Christian Andersen, a homely little bird matures into a graceful swan. The story comes to mind once again because of Hologic, Inc., a company that was an “ugly duckling” a year ago. The question is will it soon spread its wings as graceful swan? Perhaps...see what you think.

Hologic develops, manufactures and supplies diagnostic, medical imaging systems, and surgical products for the healthcare needs of women. To that end it has become an industry giant operating in four distinct sectors of the marketplace: Breast Health, Diagnostics, GYN Surgical and Skeletal Health. The Company currently has a market cap of $5.1 billion.

Unfortunately, while more women are having wellness exams, surgical and other more discretionary procedures are clearly feeling the brunt of the weak economy and persistent unemployment.

My non-GAAP (non-cash items removed) earnings forecast for 2012 was $1.34 per share with a 12-month target price for the shares of $22 for a potential capital gain of 23 percent. So how did Hologic do? Non-GAAP earnings were $1.38, exceeding my estimate, while the shares closed recently at $20.47 for a 14.74 percent capital gain.

The Company’s corporate strengths are revenue growth, rising share value and expanding profit margins. However, deteriorating net income, disappointing return on equity and generally higher debt management risk, represent the negative side of the ledger.

The company’s 2012 fourth-quarter earnings came in at $0.37 per share, while revenues increased 26 percent to $588.5 million. This despite economic uncertainties in Europe, slower sales cycles and increased pricing pressure.

Hologic’s international focus resulted in 27 percent of its revenues during the reported quarter coming from the international marketplace. Despite economic uncertainties in Europe, Hologic has been building its international infrastructure and fortifying management resources in the emerging markets of China, Latin America, the Middle East and Eastern Europe.

The Company recently acquired TCT and Healthcome Technology, both based in China. Following the acquisition of TCT, China became Hologic’s largest ThinPrep (a cervical cancer diagnostic for women) market outside the United States.

For its fiscal year ended September 29, 2012, revenues totaled $2.0 billion, an increase of 11.9 percent or 12.6 percent on a non-GAAP adjusted basis. For the same 12-month period, the Company reported a net loss of $0.28 per share, as compared with a positive $0.59 per share for the comparable period a year ago.

Non-GAAP earnings increased 9.6 percent to $1.38 per share for the twelve months ended September 29, as compared to $1.27 per share for the same period in the prior year.

In its guidance for the first quarter of fiscal 2013, that ended December 29, Hologic is projecting non-GAAP revenues of $640 to $645 million and non-GAAP earnings per share of $0.37. This reflects additional expected interest expense of $45 million related to the financing of the Gen-Probe acquisition, as well as the expected seasonal increase in operating expenses related to trade shows that occur in the first quarter.

For all of fiscal 2013, the Company’s management is projecting non-GAAP revenues of between $2.61 and $2.64 billion, an increase of 30 to 31 percent over fiscal 2012. Non-GAAP earnings are projected at between $1.56 and $1.58 per share, again reflecting additional interest expense of $180 million related to the financing of the Gen-Probe acquisition, as well as a charge of approximately $25 million related to the medical device excise tax beginning on January 1, 2013.