3 Reasons HOLX is Risky and 1 Stock to Buy Instead

Over the past six months, Hologic has been a great trade, beating the S&P 500 by 20%. Its stock price has climbed to $74.17, representing a healthy 31.3% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Hologic, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.

Why Is Hologic Not Exciting?

We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons you should be careful with HOLX and a stock we'd rather own.

1. Constant Currency Revenue Hits a Standstill

In addition to reported revenue, constant currency revenue is a useful data point for analyzing Medical Devices & Supplies - Imaging, Diagnostics companies. This metric excludes currency movements, which are outside of Hologic’s control and are not indicative of underlying demand.

Over the last two years, Hologic failed to grow its constant currency revenue. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Hologic might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Hologic’s margin dropped by 20.6 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Hologic’s free cash flow margin for the trailing 12 months was 18.9%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Hologic’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Hologic isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 16.3× forward P/E (or $74.17 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the Amazon and PayPal of Latin America.

Stocks We Like More Than Hologic

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