Hologic: A Little Patience Is Required

| About: Hologic, Inc. (HOLX)

According to the U.S. National Cancer Institute, one in eight women will be diagnosed with breast cancer sometime during their lifetime. It's a big issue because breast cancer tends to be an aggressive form of oncology and unless it is detected early, your survival rate is slim. However, with technological advances in screening systems and a much more aware public in regards to preventive behavior, you now have a 98% survival rate when the cancer is diagnosed early and is still localized to the breast.

Hologic (NASDAQ:HOLX) has the lion's share of the U.S. mammography equipment market with a 65% share; and the company is rapidly expanding overseas. Hologic is also a one-stop-shop for hospitals looking to purchase diagnostic and medical imaging systems for women's healthcare that go beyond mammography with business segments in GYN Surgical and Skeletal Health. On February 11th, the FDA approved Hologic's tomosynthesis system for 3-D mammograms and this appears to be the wave of the future with competitors lagging Hologic's already impressive lead in not only market share, but technology too. As a recent analyst report from Citigroup Global Markets states:

With tomo now approved, we believe the next closest competitor (NYSE:GE) is at least 1-2 years behind.

Citigroup Global Markets rates the stock a 'Buy' with a $24 price target on it, and they aren't alone with their positive assessment of Hologic. Out of the 26 analysts that cover Hologic, 13 have a strong buy rating, 7 have a buy and 6 say to hold the security (as reported on Yahoo Finance). The mean price target is $23/share, and, at its current quote of $20.50, you may get a 10%-15% pop in it this year. However, I am wondering if maybe it is too soon to pull the trigger on Hologic.

Hologic has a great story behind it and as CEO Robert Cascella said in the last conference call:

...tomosynthesis has the ability to do to the digital, what digital did to the analog, and that is to create a market dynamic of technological obsolescence.

When the FDA approved 3-D imaging earlier this month, it cited two studies done by board certified radiologists that showed a 7% improvement in their ability to distinguish between cancerous and non-cancerous cases. A big improvement over the traditional 2-D systems. I agree with Mr. Cascella that more women will opt for the 3-D imaging because, let's face it, we are talking about life and death.

With a first-mover advantage, Hologic seems to have a significant head start. However, a November 26, 2010 ValueLine report claims that it will take at least 18 months after FDA approval of Hologic's 3-D imagining machines for the Medicaid and Medicare systems to create a reimbursement code for the test. In ValueLine's February 25th report on Hologic, the group states that it isn't until after what typically is usually a two year process for Medicaid and Medicare to make a decision on reimbursement, that private insurers will follow suit. CEO Cascella uttered similar remarks in his conference call saying they were a few years away from a full roll out, which should impact initial usage.

A lot can happen in two years, not only with Hologic, but also with the overall stock market. Based on valuation, Hologic to me seems fully priced with a 2011 P/E ratio of 16 and a 5 year consensus CAGR of 8.5% by the 26 analysts that cover it. That's a PEG ratio of 2 which is very expensive for even a growth stock, let alone a stock that has has not improved on the earnings front for three consecutive years. Earnings/share for 2008, 2009 and 2010 were $1.18 per year. Zero, nada, zip for earnings growth.

I realize the market is always looking ahead when pricing a stock and I don't want to spoil the show, but this stock has been buoyed by the market's ascent. And if the market has a correction, Hologic could be had for a much more advantageous price somewhere down the road, especially if it's not supposed to get in gear for two years. All of the analysts that are giving you Buy and Strong Buy signals are just sandbagging you and paying lip service. This is a good, solid company with an excellent product resumé and would be an excellent holding in any portfolio. It may even be an acquisition candidate, so if you want to dance while the music is still playing, by all means, buy it. However, if you don't want to get caught up in the hype, then a little patience is required.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Am short the market with leveraged ETFs.