Hologic Earnings: Nonpandemic Product Lines Push the Firm’s Growth to an Inflection Point

Hologic’s HOLX fiscal third-quarter results were another unsurprisingly mixed bag, putting the firm largely on track to meet our full-year expectations, and we’re holding steady on our $70 fair value estimate for now. As expected, further weakening demand for COVID-19 testing posed a headwind, while nonpandemic molecular diagnostic tests saw solid growth. We think this quarter was an inflection point though—for the first time in seven quarters, the declines in COVID test revenue were almost fully offset by the firm’s remaining nonpandemic businesses, which displayed particular strength in the breast health and gynecological surgical product lines. We continue to think both the diagnostics and breast imaging businesses benefit from switching costs that support Hologic’s narrow economic moat.

The underlying strength in non-COVID diagnostics appeared solid, in our view, with revenue growing in the double digits for the fifth consecutive quarter. We think this reflects well on both the attractiveness of Hologic’s existing test expertise in sexually transmitted infections, as well as savvy decisions by management to expand the testing library with tuck-in acquisitions. Due to the lift from COVID-19, Hologic was sitting on just shy of $2.8 billion in cash at the end of June, giving it plenty of flexibility for further mergers and acquisitions activity. Management indicated it remains open to somewhat larger transactions at this point. If Hologic does pursue a significantly larger deal, we’ll be curious to see if the current management team is able to avoid the firm’s historic pattern of overpaying and destroying value. It could be a toss-up. On one hand, CEO Stephen MacMillan left an enviable record of acquisitions during his time at Stryker. On the other, the purchase of Cynosure under his watch at Hologic was arguably a mess.