Hologic Looks To Be A Solid Play, With Carl Icahn Owning 12.3%

| About: Hologic, Inc. (HOLX)


Carl Icahn became the company's largest shareholder last year, after acquiring a 12.3% stake worth $865m today.

Hologic beat earnings and revenue estimates in the latest quarter, and raised its outlook for FY14.

Hologic is the only company that can increase the detection of invasive breast cancers, while not increasing the detection of low-grade cancers.

Hologic (NASDAQ:HOLX) piqued my interest when I read that Carl Icahn owned 12.3% of the company. Needless to say, wherever Carl goes, I try and follow. His track record speaks for itself. I was also surprised to find that Hologic has been serving the women's health market for 29 years, and has been publicly traded for 24 of those years.

Hologic describes itself as "a leading developer, manufacturer and supplier of premium diagnostic products, medical imaging systems, and surgical products, with an emphasis on serving the healthcare needs of women throughout the world." Its primary focus is "in mammography and breast biopsy, breast magnetic resonance imaging, radiation treatment for early-stage breast cancer, cervical cancer screening, treatment for menorrhagia and uterine fibroids, osteoporosis assessment, preterm birth risk assessment, mini C-arm for extremity imaging, and molecular diagnostic products including human papillomavirus (HPV) testing and reagents for a variety of DNA and RNA analysis applications."

What Carl Icahn is betting on is a turnaround. In the Q3 earnings release, CEO Stephen MacMillan said "our fiscal third quarter results demonstrate the progress we are making in our turnaround efforts."

Q3 earnings report

Revenues increased just 1% to $632.6 million. Revenues though did come in $10.71 million higher than analysts had anticipated. Three of its four business segments posted revenue growth. The outlier was its diagnostics business, which saw revenues drop 1.5% y/y. Hologic earned $0.37 per share, which beat the consensus by three cents.

What I liked most about the report is that Hologic raised its guidance for FY14. The company expects full-year revenues to be $2.50 billion to $2.51 billion. This is up from its previous guidance of $2.46 billion to $2.49 billion. Hologic expects to now earn $1.44 to $1.45 per share, up from its prior estimate of $1.37 to $1.40.

Confirmation from JAMA

The highlight of the quarter came from its breast health unit. Revenues there grew 3.5% to $238 million. I expect revenues in this segment to pick up, after a favorable study written in the Journal of the American Medical Association (JAMA). The study reviewed Hologic's 3D Mammography Test and found that the test demonstrated a 41% increase in the detection of invasive cancers, a 29% increase in detection of all breast cancers, and 15% decrease in recalls for additional imaging when compared with conventional digital mammography.

The study reviewed more than 450k breast exams. Hologic has been saying for quite some time that its test can save hospitals time and money by increasing the detection of invasive breast cancers and lowering the need for additional testing. This will also go a long way in eliminating the detection of low-grade cancers, which are then overdiagnosed and overtreated in many instances.

CEO Stephen MacMillan said on the earnings call.

"For the first time, on a large-scale basis, we have data clearly demonstrating that our 3D mammography and only ours, uniquely increases the detection of invasive breast cancers, which are cancers most important to identify and treat early while not increasing detection of low-grade cancers that some have suggested are overdiagnosed or overtreated. These results address the most frequently cited concerns with breast cancer screening and underscore the value of our 3D technology in addressing these challenges. We believe the JAMA study confirms what several other studies have shown so far, that 3D mammography facilitates the early detection of invasive cancer, lowers the rate of callbacks with unnecessary testing and creates meaningful savings to the healthcare system."

Turnaround and debt reduction is taking place

In Q3, Hologic installed a new leadership team. The company now has a new CFO, new COO, new head of International and a new president of Breast and Skeletal Health.

Hologic was also able to boost its gross margin in Q3 by 50 basis points. The gross margin of 62.9% resulted from a boost in revenues, favorable product mix and favorable geographic mix.

So far this year, Hologic has paid down $579 million of its debt load. Its net debt-to-EBITDA ratio now stands at 4.2x, compared to 4.4x at the end of Q2. The company's goal is to get this ratio down to 2.5x by FY17. The total debt load stands at $4.3 billion, which is offset by $638 million in cash.

Bottom line

I liked what I saw in the Q3 report from Hologic. The company is making progress, and it now has a definitive study from JAMA that it can use to boost sales of its 3D Mammography Test to hospitals. With Carl Icahn as the largest shareholder and shares trading at just 16 times next year's earnings, Hologic look like a solid bet in today's market.

Disclosure: The author is long HOLX.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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