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Shares of Hologic (NASDAQ:HOLX) have been trading relatively stagnant in recent years, while the underlying business has seen quite some volatility since the outset of the pandemic. This creates quite an interesting set-up.
While lucrative pandemic-related sales are on their retreat, Hologic has seen continued growth, bought back shares and maintained balance sheet discipline. All this has gradually pushed down valuations to quite appealing multiples, amidst solid organic growth and little leverage, as shares therefore start to look quite compelling here.
A Global Health Play
Hologic aims to elevate women’s health across the globe, as it over time has grown to become a $4 billion revenue business. The company has become quite a diverse health business with diagnostics making up for nearly half of sales, complemented by a near 40% breast and skeletal division, as well as a smaller 15% revenue contribution from surgical applications.
Nearly two-thirds of these sales are generated from consumables, with the remainder split pretty evenly between service and related revenues, as well as capital investments. Despite the global focus, it remains the US which is responsible for about three quarters of sales.
The company has seen steady growth over the past decade, although it was the pandemic which created a real boom and bust cycle. The base business has steadily grown from $2.5 billion in 2014, to $3.8 billion by 2023, marking steady growth which averaged around 4%. It was the COVID diagnostics business which created a real boom as sales from these products totaled nearly a billion in 2020, were reported at more than $2 billion in 2021, as the retreat of the pandemic made that this contribution fall to a quarter of a billion in 2023.
This has driven a solid increase in earnings, from about $1.50 per share in 2014, to $4 per share in 2023. These adjusted earnings fell from around $6 per share in 2022, and as high as $8 per share in 2021, with the retreat in earnings being the result of the retreat of the lucrative COVID diagnostics sales.
Despite the growth and net buyback pursued over this period of time, the company actually managed to cut leverage ratio from about 4 times EBITDA a decade ago to largely break-even levels, a real achievement as well.
About The Current Valuation
In November of last year, the company posted its 2023 results, a year in which reported revenues fell 17% to $4.03 billion amidst the retreat of the pandemic related revenues, as fourth quarter sales fell just a percent to $945 million.
Full year adjusted earnings were reported at $3.96 per share, after no less than 15 adjustments being made, with GAAP earnings reported at $1.83 per share. As the vast majority of the reconciliation relates to amortization charges and alike, I am happy to adjust for these. While these earnings were down a third from 2022, fourth quarter earnings were up seven cents (on an annual basis) to $0.89 per share.
Net debt was equal to just $96 million, which is peanuts, but the company held relatively large absolute cash levels and operated with larger debt levels as well, each around $2.8 billion. This was actually a good thing, with the company obtaining minimal net interest income as yields on cash holdings exceeded the interest paid on debt.
And Now?
With the headwinds of pandemic related revenues being on their retreat ending, the company is preparing for growth. While fourth quarter revenues fell just a percent, and earnings actually increased, it is a $3.90-$4.10 earnings per share guidance for 2024 which feels soft, at the midpoint suggesting just a percent in earnings per share growth. This in itself could easily be explained by share repurchases reducing the share base. This is certainly the case as the company recently announced a $500 million accelerated share buyback program.
That said, there still is a small tailwind as the company guided for 5-7% organic sales growth in 2024, yet this only results in rather flattish (or even slightly reported lower) sales at a midpoint of $3.96 billion.
This makes that reported results remain stagnant (for the last year here, as Covid phases out entirely) as growth has been driven by strategic imperatives made with the pandemic related funds. After all, the company made some acquisitions since the start of the pandemic, including a $159 million deal for Diagenode, a $795 million deal for MobidiagOy, and a $160 million deal for Bolder Surgical, among others.
Valuations Come Down
Shares of Hologic have traded in a relatively tight $60-$80 range since the outset of the pandemic, now trading at $73, levels which grant the company an $18.0 billion equity valuation. This values the business at a reasonable 4.5 times sales multiple and about 18 times earnings multiple, that for an unleveraged business.
With net debt being paid down and the headwinds from the pandemic on its retreat, there clearly is room for potential for reported revenue growth, while valuations have gradually come in (as prevailing levels a few years ago were accompanied by a higher enterprise valuation on the back of a larger share count and net debt).
While it is hard to pinpoint the moment at which these qualities will be recognized, the potential for year-over-year sales growth is arriving soon here. On the first day of February, the company posted a 6% fall in reported sales to $1.01 billion, with organic sales up 6%. This prompted the company into hiking the full year 2024 sales guidance to $4.02 billion, with earnings now seen around a midpoint of $4.04 per share.
Earnings growth might be aided by the stronger revenue performance and accelerated buyback program, which reduced the share count to 240 million shares. This came at the expense of net debt ticking up to $627 million, yet net interest income is largely around zero, while net debt is equal to a minimal half times EBITDA here. The decision for buybacks might actually have to do with lack of suitable M&A opportunities, as management stressed discipline with such capital allocation route (to be accretive on the bottom line) on the most recent conference call.
Given all of this, I am warming up to the share here. At 18 times relatively clean earnings, a rather unleveraged balance sheet, and amidst single digit organic growth, all this looks like a fair combination here. This simply comes after shares were trading stagnant, as expectations have simply come down over time. While there is no immediate trigger to send shares higher, it is the incremental improvements which drive appeal here.
