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Investors should always be a little leery of seeing too much love and praise for their holdings; having a few skeptics left to convince leaves some upside. Although Hologic (NASDAQ:HOLX) shares have come up nicely in the past quarter, there is still a lot of growth potential in the earnings and in the stock.

Beat, Raise, Rinse, Repeat

Hologic has established a decent track record of slightly outperforming expectations and this fiscal first quarter continued that trend. Revenue rose a little more than 9% this quarter, slightly topping the average guess, as the company logged 10% or better sales growth in its breast health, diagnostics, and skeletal businesses. GYN Surgical was the laggard, with less than 4% growth over last year.

Profits were a little more mixed. Gross margin was up a bit (about 50 basis points), but the company's expected increase in SG&A spending to support the tomo rollout and integrate acquisitions mitigated that. Operating income, then, was up about 9% as well for the quarter.

Tomo: Today And Tomorrow

The biggest issue on Hologic, good or bad, is the pace of the company's rollout of the Dimensions tomosynthesis platform. On the plus side, this is the only tomo platform on the market and it has clinical trials have shown better sensitivity and specificity when it comes to breast cancer detection. Hologic also has a big upgrade cycle over the next four years and a U.S. installed base (across all competitors) of roughly 10,000 systems.

Hologic also has a meaningful lead on its rivals. General Electric (NYSE:GE) will be hard pressed to get its tomo product to market before early 2013, and it looks as though the company is pursuing a non-inferiority angle with its filings. Siemens (SI) is even further behind and likely won't see a tomo system on the market before 2014, while Fujifilm seems to be sidestepping tomosynthesis entirely for the time being.

Is there bad news? Sure. I've written at great lengths about the tough capital spending environment at hospitals these days, as well as the more challenging reimbursement environment. Although Hologic is reporting good uptake and reimbursement in its targeted early adopter market, it's still an uphill road. Still, many analysts expect less than 8% market penetration by the end of 2013 and Hologic may well beat that number.

Other Businesses Generally Moving Forward

Outside breast health, performance was still generally positive. Diagnostics was lifted by good ThinPrep volumes, which in turn were driven in part by the acquisition of TCT (a Chinese distributor). The company's Cervista HPV testing platform also got a boost from FDA approval of high throughput automation and that should help the company compete with incumbent leader Qiagen (NASDAQ:QGEN) and fellow grower Gen-Probe (NASDAQ:GPRO) in what is becoming an increasingly competitive market.

The surgical business continues to be decidedly more mediocre. NovaSure is still a good business but rather mature in terms of growth potential. Although the company recently beat Conceptus (NASDAQ:CPTS) in court and will neither be blocked from the market nor have to pay royalties for its non-surgical sterilization product (Adiana), the company has still had challenges beating Conceptus in the market and the lower demonstrated efficacy is likely going to be hard to overcome.

The Bottom Line

Forecasting less than 6% compound free cash flow growth over the coming decade still clears the way for a price target in the mid-$20s. Though GE will be likely be a formidable competitor once its in the tomo market (and will likely also preach a pro-tomo message), I happen to think that expectations for Hologic's tomo share are low and these estimates tend toward the conservative. It's also worth wondering if the company will do more to grow its business outside of breast health - a deal to expand its diagnostics business or perhaps an acquisition of the women's health business of Cooper (NYSE:COO) would not shock me.

In any event, I believe that expectations are still too low on Hologic, and that this is a stock that is still worth considering as a new purchase.

Source: Skepticism Still Working For Hologic Investors