Hologic: How To Buy This Healthcare Company At A Discount

Nov. 9.12 | About: Hologic, Inc. (HOLX)

Hologic (NASDAQ:HOLX) is set to report earnings on Monday, and I believe this creates a great opportunity to attempt to buy the stock for a discount. This innovative company deserves to be owned, and is undervalued at current levels. However, for those who may not be too familiar with what they are and what they do, let's examine the fundamentals.

Hologic develops, manufactures and distributes medical imaging systems, diagnostic and surgical products. Their products are mainly for serving the healthcare needs of women. Hologic is split into four divisions: Breast Health, Diagnostics, GYN Surgical, and Skeletal Health. They currently have a market cap of approximately $5.3 billion, and trade at 14.5 times 2012 earnings. This multiple is more than justified by their expected earnings growth rate, as the company is expected to earn $1.64 per share in 2013 and $1.88 in 2014. Using the same multiple, this would represent a 1-year target price of $23.78 and a 2-year target of $27.26.

Analysts tend to agree with this, and in fact the average 12-month target of all analysts covering the company is $24.38. The company has grown revenues by 4% in the past year, not outstanding, however operating income rose 11% from last year, a solid growth indicator.

Being that I have bullish prospects on Hologic, I want to use the excessive volatility created by the anticipation of Monday's earnings announcement in order to either buy the stock at a discount or make a profit.

The first trade involves the November options, which expire next Friday. I want to sell the $20 puts for $0.80, which could produce two possible favorable scenarios. If the earnings report is favorable, and the stock either trades flat or pops, the puts expire worthless, and you keep the premium collected, a 4% profit in only one week. If, on the other hand, the stock drops, we are forced to buy it for $20, however we still keep the premium, making our net cost $19.20, which is also our breakeven performance for the trade.

The second and more long-term trade involves the June 2013 call options. Given my target price of approximately $24.00, I want to create a favorable call spread that reflects this goal. I want to buy the $21 calls for $1.75 and sell the $24 calls for $0.75, for a net cost of $1.00. I love this trade because of the extremely favorable risk/reward it creates. If I'm right, and the stock climbs to $24 or more by expiration, the spread will be worth $3.00, for a potential gain of 200% in only 8 months. This trade breaks even as long as the stock is worth $22 or more upon expiration, which according to all analysts, seems entirely plausible.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.