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<DAILY TROUBLE>
Tuesday, November 17, 1998
Hologic Inc.
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Phone: 781-890-2300
Website: www.hologic.com
Price (11/16/98): $13
HOW DID IT FIND TROUBLE?
Hologic has been bad to the bone. Shares of the x-ray specialist have been nuked in recent months as a string of disappointing quarters have cut short the investor euphoria that had erupted back in March when the company received FDA approval for an osteoporosis-detecting sonometer.
The Sahara ultrasound device would measure the bone density to aid in the diagnosis. However, since then, Hologic's bones have gone brittle. Decelerating earnings growth over the past two years has lapped over into negative earnings growth for the company, and the investors who were once so optimistic over the Sahara approval have left the stock deserted.
BUSINESS DESCRIPTION
Massachusetts-based Hologic makes x-ray and ultrasound densitometers that gauge bone density to help diagnose, and ultimately monitor, metabolic bone diseases like osteoporosis. More than 28 million Americans are afflicted with osteoporosis, primarily women.
Beyond its stateside headquarters the company also has three European sales offices. In other regions a network of global distributors represent Hologic's product lines.
FINANCIAL FACTS
Income Statement
12-month sales: $115.6 million
12-month income: $10.4 million
12-month EPS: $0.75
Profit Margin: 9.0%
Market Cap: $179.4 million
Balance Sheet
Cash: $48.4 million
Current Assets: $131.8 million
Current Liabilities: $32.2 million
Long-term Debt: None
Ratios
Price-to-earnings: 17.3
Price-to-sales: 1.6
HOW COULD YOU HAVE SEEN IT COMING?
Even before the favorable March FDA announcement things were amiss. As Investor's Business Daily had pointed out just months before, earnings growth had shrunk in each of the previous five quarters. From 288% to 170% to 21% to 13% to 7%, this was a company going heavy on the brake pedal.
Yet the clearest image of the emaciated internals of the x-ray industry came out the week after Hologic received the FDA nod. Rivals Lunar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LUNR)") else Response.Write("(Nasdaq: LUNR)") end if %> and Northland Medical Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NRLD)") else Response.Write("(Nasdaq: NRLD)") end if %> had some bleak news for Wall Street. Lunar warned that sales for the March quarter would be lower than the year before. Northland announced that it would have to restate its revenues over the past two years -- to the downside.
If the sector was in trouble, why would investors want to sit in Hologic's waiting room? Sure, maybe the Sahara sonometer would eventually salvage the company, but on the same day that Lunar and Northland were getting hammered, why were Hologic shares soaring in the afterglow?
Hologic eventually continued its decelerating ways, joining Lunar in the lower earnings camp. With lower-than-expected earnings over the next two quarters, the optimism for Sahara gave way to the short-term fundamental concerns. The debacle came as no surprise to Foolish sector watchers.
WHERE TO FROM HERE?
Staring at Hologic's chart shows a pronounced curvature of the spine -- but the company still has some backbone. The earnings growth over the past few years that had gone from $0.34 a share in 1995 to $0.90 and $1.30 per share over the next two years tumbled to $0.75 a share in fiscal 1998 (which ended in September). Sales actually rose 8.3%, so the culprit is margin erosion as the company's product mix has leaned towards products with a lower markup.
So the bottom line is clearly under pressure. When the company closed out the fiscal year reporting just a dime a share in earnings, it was a blow to Wall Street's expectations of $0.31 a share. That will surely have analysts chopping away at 1999 estimates, which were as high as $1.51 a share just before the earnings letdown.
But, you might be asking, where is the promised backbone? Well, the balance sheet is a fortified picture of health. It's debt-free and cash rich with a relatively liquid book value of $10.50 a share. That should serve as support as long as the company remains profitable, something that seems quite likely even during these trying times in the sector as a whole. The substantial interest income received on the idle cash should even cushion any operating shortfalls.
A boost for Hologic may also come in the form of the validation of bone density ultrasounds in the medical field. In January the practice will receive a permanent Certified Procedural Terminology code from the American Medical Association. That will help facilitate doctor reimbursement from private insurers as well as Medicare/Medicaid and should help grow demand for the Sahara -- and possibly lead to a rising Hologic in this apathetic desert being more than just a mirage.
-Rick Aristotle Munarriz
([email protected])
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