3 Reasons to Sell HOLX and 1 Stock to Buy Instead

Shareholders of Hologic would probably like to forget the past six months even happened. The stock dropped 28.3% and now trades at $56.47. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Hologic, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Hologic Not Exciting?

Even though the stock has become cheaper, we're cautious about Hologic. Here are three reasons why there are better opportunities than 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. Shrinking Adjusted Operating Margin

Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.

Looking at the trend in its profitability, Hologic’s adjusted operating margin decreased by 23.2 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 30.2%.

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. Unfortunately, Hologic’s ROIC has decreased significantly over the last few years. 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’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 12.7× forward P/E (or $56.47 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.

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