4/19/2021 This Covid Testing Stock Is Cheap. Why It’s Time to Buy Hologic.

| Barron's

HEALTH CARE BARRON'S STOCK PICK

This Covid Testing Stock Is Cheap. Why It’s

Time to Buy.
By Evie Liu

Updated Feb. 12, 2021 8:30 am ET / Original Feb. 12, 2021 8:16 am ET

Workers package collection tubes and swabs together on the production line at Hologic.
Photograph by Peter Bohler

Sometimes, you really can have it both ways. Consider medical-diagnostic

company Hologic, a Covid-19-beneficiary but also a business that will benefit as life
returns to normal.

To say that Covid-19 has been good for Hologic’s (HOLX) business is an
understatement. The company, which provides molecular diagnostic equipment
for Covid-19 PCR tests, saw sales in its diagnostics division grow to $1.1 billion
during the fiscal first quarter that ended in December 2020, up from $312 million in
the same quarter of 2019, while earnings quadrupled.

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4/19/2021 This Covid Testing Stock Is Cheap. Why It’s Time to Buy Hologic. | Barron's

The market seems reluctant to give Marlborough, Mass.–based Hologic credit for
that growth. While its stock has gained 52%, to $80.02, in the past 12 months, three
times the S&P 500 index’s 17% rise during the same period, its price/earnings ratio
has fallen. That’s a sign that investors expect the boost from Covid-19 testing to
fade as the disease ebbs. Yet, the contraction in valuation overlooks the likelihood
that testing will continue, while Hologic’s success with the coronavirus could lead
to growth in its other businesses. For investors, Hologic looks like a bargain waiting
to be snapped up.

ALSO READ Hologic was a much different

How Covid-19 Is Changing the Vaccine company before the coronavirus

Industry arrived. Breast Health, which
provides everything from screening
The Pandemic Could Be ‘Effectively’ Over to treatment, accounted for 39% of
by April, J.P. Morgan Says sales at the end of fiscal 2019, with
diagnostics second, at 36%. Now,
Some Families With Young Children Could
Get $12,800 in Relief diagnostics has grown to 56% of
revenue, while Breast Health has
Stocks Close at New Records slipped to second, at 30%. GYN
Surgical, the third-largest segment,
is 10%, down from 13% in fiscal 2019.

Hologic is expected to post total sales of $5.8 billion in fiscal 2021, up 53% year
over year.

Hologic currently trades for just under nine times fiscal-2021 estimated earnings of
$8.95 a share, compared with its five-year average of nearly 19 times earnings.
Larger Covid-19-test providers, such as Thermo Fisher Scientific (TMO) and Abbott
Laboratories (ABT), fetch 23 and 25 times earnings, respectively, although Covid-
19-test supplies are a much smaller part of their business.

Slideshow: Inside Hologic’s Diagnostic Operations

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4/19/2021 This Covid Testing Stock Is Cheap. Why It’s Time to Buy Hologic. | Barron's

1 of 10
Since the onset of the Covid-19 pandemic, Hologic’s revenue from diagnostics has grown from 36% to 56%
Above, Vivian Dong works on one of the company's SARS-CoV-2 projects.

PHOTOGRAPH BY PETER BOHLER

•••• •
By some estimates, the Covid-19 diagnostics business could fall by 35% in the next
year, which helps explain Hologic’s steep discount. But Jefferies analyst Raj
Denhoy thinks those concerns are overblown. Even with the vaccine rollouts,
extensive testing may still be needed before surgery and travel, for instance, and
around adoption of the vaccine itself. “The downward trajectory next year isn’t
going to be as bad as people feared,” he says. “Covid testing probably will
continue for quite some time.”

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4/19/2021 This Covid Testing Stock Is Cheap. Why It’s Time to Buy Hologic. | Barron's

Besides, Hologic is more than just a bet on Covid-19 testing. Its growing diagnostic
business has allowed it to place more of its devices in labs and hospitals around
the country, and they are likely to stay there, especially because its automated
testing is simpler than mixing and matching products from different companies. As
a result, Hologic is well positioned to emerge in the postpandemic world with a
larger market share in the broader molecular-diagnosis industry. That should help
to offset any falloff in Covid-19-related revenue in years to come, says Wells Fargo
analyst Dan Leonard.

Hologic is known as one of the largest players in breast-imaging technologies such

as mammography. It also sells other medical devices used in gynecologic
surgeries, biopsies, and other procedures. Those businesses were hurt last year, as
fewer people had regular checkups or nonurgent procedures. But they recovered
to prepandemic levels in the December quarter, bringing in total revenue of $482
million.

Things may only get better. “We expect to have a very good year in 2021 based on
our contributions to Covid testing, as well as the continued recovery of our breast
health, surgical, and broader diagnostics franchises that benefit women’s health,”
says Steve MacMillan, Hologic’s chairman, president, and CEO.

A Healthy Rally
Hologic should continue to outperform the market even after lockdowns end.

S&P 500 Hologic

30%

20

10

-10
Nov. 2020 '21
As of April 19, 5:12 p.m. ET
Source: FactSet

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4/19/2021 This Covid Testing Stock Is Cheap. Why It’s Time to Buy Hologic. | Barron's

With the tailwind of Covid-19 testing and a recovery in other business segments,
Wall Street expects Hologic’s earnings to grow by 125% in fiscal 2021—and that’s
atop a 64% gain, to $3.98 per share, in fiscal 2020. “They are going to be a strong
beneficiary of the Covid-19 situation as well as the post-Covid environment,” says
Ken Laudan, co-manager of the $1.9 billion Buffalo Discovery fund (BUFTX), which
counts Hologic among its top holdings. “You have a business that would be hitting
on all cylinders.”

Covid-19 has done wonders for Hologic’s cash flow. Laudan estimates that the
company probably will generate $1.5 billion to $1.8 billion of free cash flow due to
the Covid-19 opportunity. Denhoy is even more optimistic, predicting $2.5 billion to
$3 billion in free cash from “insatiable Covid demand” over the next two years.
That’s money that can be put to use for reinvestment, mergers and acquisitions,
and stock buybacks. Hologic is planning to do all of that.

Hologic, which sports a market capitalization of $20.5 billion, repurchased 1.5

million of its shares—worth about $101 million—during the December quarter. The
company just announced a $1 billion stock-repurchase authorization over the next
five years. If it chooses to execute that entire buyback program, the total number of
shares could be reduced by 5%.

Hologic is also looking to expand its business portfolio through acquisitions. It

announced the purchase of two small firms in January—Biotheranostics, in
molecular oncology diagnostics, and Somatex Medical Technologies, one of its
suppliers in Germany. These deals seem to be a precursor to further transactions.

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4/19/2021 This Covid Testing Stock Is Cheap. Why It’s Time to Buy Hologic. | Barron's

On its latest earnings call two weeks ago, Hologic management said the company
is pursuing a number of acquisitions and hopes to complete more deals this year.

One way or the other, Hologic will keep growing, and don’t be surprised if its
valuation grows, too. At about 11 times 2021 earnings estimates, it would be worth
$95, Leonard’s price target—up 11% from Thursday’s close. At 12 times earnings,
the stock would be worth $106, Denhoy’s target, up 32.5%.

Either way, Hologic passes the test.

Write to Evie Liu at evie.liu@barrons.com

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