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Here's Why You Should Hold on to Hologic (HOLX) Stock for Now

Zacks Equity Research
·4 mins read

Hologic, Inc. HOLX has been gaining on robust growth in the Diagnostics segment. Its slew of regulatory approvals has also been impressive. Its better-than-expected results in the third quarter of 2020 buoy optimism. However, downsides may result from a stiff competitive landscape and a dull segmental performance.

Over the past year, the Zacks Rank #3 (Hold) stock has outperformed its industry. The stock has gained 35.8% compared with 24.9% growth of the industry and 13.7% rise of the S&P 500.

The renowned provider of medical imaging systems and surgical products, catering to women’s healthcare needs, has a market capitalization of $17.12 billion. The company projects 16.4% growth for the next five years and expects to maintain strength in its Diagnostics business. The company surpassed estimates in two of the trailing four quarters and broke even in the other two, the average surprise being 28.47%.

Let’s delve deeper.

Regulatory Approvals: We are upbeat about Hologic’s recent regulatory clearances. This month, the company received the FDA’s Emergency Use Authorization (EUA) for its Panther Fusion SARS-CoV-2 assay. Also, the FDA has authorized Hologic’s pooling protocol, which was previously announced on Aug 11, for symptomatic testing with the Panther Fusion SARS-CoV-2 assay.

In May, Hologic received the FDA’s EUA for its Aptima SARS-CoV-2 assay (that runs on the company’s fully automated Panther system) for the detection of the COVID-19-causing virus.

Robust Demand for Testing: We are optimistic about Hologic’s strength in Molecular Diagnostics amid the pandemic. The company has seen continued growth in the core molecular diagnostics sub-segment in the fiscal third quarter. The company generated solid revenues from strong customer adoption of Hologic’s two SARS-CoV-2 assays that run on the Panther and Panther Fusion systems. Following the robust demand for the assays, Hologic is on track to scale up its molecular diagnostics manufacturing capacity.

Molecular diagnostics’ robust international performance was boosted by the unprecedented surge in testing demand due to the pandemic. This led the company to scale up production in the third quarter.

Strong Q3 Results: We are upbeat about Hologic’s third-quarter fiscal 2020 results. Its bottom-line growth in the quarter amid business disruptions is impressive. Rise in organic and Diagnostic revenues buoys optimism. Robust demand for its COVID-19-related products bodes well. Ongoing recovery in other segments has enabled it to provide fiscal fourth-quarter guidance, which instills investor confidence. Expansion of both margins looks encouraging.

Downsides

Competitive Landscape: Hologic operates in a highly competitive industry, including biggies like Siemens. The FDA’s decision to re-classify FFDM devices to class II from class III makes it easier for all medical devices companies to introduce similar products in the market. Subsequently, the approval process for class II devices will require 510(k) clearance, rather than the lengthy PMA application. This will enable easier approval in the United States, thus intensifying competition among medical device companies.

Dull Segmental Performance: Hologic’s performance across majority of its segments in the fiscal third quarter was disappointing, resulting from pandemic-led business disruptions. Revenues at majority of the segments declined primarily due to adverse impacts on demand for products, especially in the United States. This was the result of customers’ focus on responding to the pandemic, delayed or reduced purchases of capital equipment and rescheduled routine screening appointments.

Estimate Trend

Hologic has been witnessing a positive estimate revision trend for 2020. Over the past 90 days, the Zacks Consensus Estimate for its earnings has moved 33.3% north to $3.04.

The Zacks Consensus Estimate for fourth-quarter 2020 revenues is pegged at $1.06 billion, suggesting 22.7% growth from the year-ago reported number.

Key Picks

Some better-ranked stocks from the broader medical space include QIAGEN N.V. QGEN, Thermo Fisher Scientific Inc. TMO and Globus Medical, Inc. GMED.

QIAGEN’s long-term earnings growth rate is estimated at 22.3%. It currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Thermo Fisher’s long-term earnings growth rate is estimated at 15.5%. It currently carries a Zacks Rank #2 (Buy).

Globus Medical’s long-term earnings growth rate is estimated at 13%. The company presently carries a Zacks Rank #2.

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