The end of the pandemic looks to finally be in sight as the number of new cases of COVID-19 in the U.S. has fallen to lows not seen in over a year. And the numbers will likely continue to fall as more people receive vaccines. While some companies will do better now as things return to normal, there are others that could struggle as pandemic-driven trends slow down…
The pandemic has led to a surge in revenue for Hologic. But with COVID testing volumes likely to decline, investors have been unloading the healthcare stock — it is down 16% in 2021 while the S&P 500 has risen by more than 12%. When the company released its second-quarter numbers on April 28, sales for the period ending March 27 were still strong at $1.5 billion — more than double the $756 million it reported in the same quarter last year. But what’s fueling that growth is its molecular diagnostics segment, which includes COVID-19 testing. That area of its business grew 391% year over year. And that has been primarily due to the company’s COVID-19 assays.
The company is anticipating a drop in third-quarter revenue to no more than $1.07 billion. But what’s troubling is that still includes a “significant outlook for COVID test revenue.” While the actual number isn’t noted, it suggests Hologic is still banking on COVID-19 testing volumes to give it a big boost next quarter. But even if that is the case, sooner or later the well will dry up. And there are some serious concerns with the business afterward, including where its growth will come from — sales from its breast health business were up 9.3% in Q2 and gynecology-related revenue rose by 8.4%. While these are decent numbers, investors shouldn’t ignore that Hologic has been extremely busy on the M&A front, and acquisitions are likely inflating the company’s top line. Since August 2019, the company has completed eight acquisitions. Not only could it be a challenge to keep costs down amid all those integrations, but it also makes it difficult to decipher how strong Hologic’s organic growth is.
Although the stock trades at a relatively modest eight times earnings, my concern is that profitability may not be a guarantee moving forward. Prior to COVID-19, Hologic incurred losses for fiscal years 2018 and 2019.And without testing volumes to help strengthen its top line plus the potential inefficiencies that will likely exist from all of its recent acquisitions, the company could again fall back into the red.
With so many question marks around its business, Hologic is a stock that poses significant risks. Investors will have to make sure that they’re aware of them and can stomach the downs if they have conviction in the stock.
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