Hologic Inc.

[tucker]

Hologic Inc. (HOLX)
Recent Price: $29.14
Revenue: $947mil
Market Cap: $7.45bil
EPS: ($2.08)
Shares Outstanding: 256mil
P/E: --
Avg. Volume: 5.07mil
Dividend: --
Book Value: $18.11
Yield: --

Hologic is the world’s largest specialized women’s healthcare company. Historically the company has derived most of its revenue from the manufacture and sale of its Selenia system and related mammography products, and a smaller portion of revenues from osteoporosis assessment products. However, in October of 2007 Hologic merged with the much larger Cytyc Corporation, and acquired product lines in cervical cancer screening, prenatal health, surgical supplies, and breast cancer treatment. As the emphasis in healthcare continues to shift to early detection and prevention, and as awareness of women’s health issues continues to increase, analysts expect Hologic’s product lines to offer excellent potential for growth.

I have attached a Standard & Poors’ research summary of Hologic to this email, and I won’t restate the contents of that summary here. However, I will add a few observations.

First, partners will notice in the Standard & Poors’ report that Hologic owns a manufacturing facility in Costa Rica. This facility was acquired as part of the Cytyc merger, and manufactures disposable components of the company’s NovaSure minimally invasive surgical products line. The company also acquired a selenium photoconductor manufacturing facility in China when it bought the German company AEG Elektrofotografie in 2006. While most of Hologic’s sales are in the North America, Europe, Japan and Australia, the company has a growing sales presence in less economically advantaged countries including Costa Rica, China, Brazil, Mexico and South Africa. To date, it does not appear that the company has made any effort to shift manufacturing of products for developed country markets to lower-wage offshore facilities. However, if RainFrog decides to invest in Hologic, we will certainly want to keep an eye on this situation.

Second, while Hologic has grown revenues more than sevenfold over the past nine years, it is worth noting that much of this growth has been through acquisitions. As the industry consolidates, growth through acquisition will become more difficult. Moreover, technology in the healthcare industry is rapidly changing, and many of Hologic’s competitors, including GE, Siemens, Phillips, Kodak, Fuji and Toshiba, may have more capital to invest in acquisitions and in research and development than does Hologic. Nonetheless, analysts project organic growth for Hologic at 21% over the next three years, which offers the potential for share appreciation.

Finally, it is worth noting that Hologics shares aren’t cheap. The net loss over the past twelve months is due primarily to charges related to the Cytyc merger, but shares have a forward P/E of 24.9. Moreover, trading volume in HOLX tends to be huge. More than 5% of the company’s shares trade daily, compared to approximately 1% for the similarly-size Lab Corp that RainFrog researched last month. With the full effects of the recent merger still untested, a history of price volatility, and an earnings announcement coming up on May 1st, partners might fairly expect HOLX to be a bumpy ride.

Standard and Poors’ sets a 12-month price goal of $38 for Hologic shares, but this may be a little ambitious. If we assume 21% organic growth over the next five years, 2008 earnings of $1.17 (analysts’ consensus), and a five-year P/E goal of 20, a fair current price might be closer to $34.81. However, since Friday’s close is a nearly 20% discount to this lower goal, Hologic may be a good risk-weighted investment.