On Tuesday, Citi downgraded Hologic (NASDAQ:HOLX) stock from Buy to Neutral and decreased the price target to $85 from $95. The adjustment follows concerns that fiscal year 2025 estimates for the company may be set too high and could require revision.
The rationale provided is an expected normalization of demand, which suggests a more conservative outlook on the stock's value compared to its peers.
When Hologic was previously upgraded earlier in the year, it was trading at a discount to its peers. At that time, the company's enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) for the second fiscal year was 13.2 times, compared to the peer average of 15.1 times.
Additionally, its price-to-earnings (P/E) ratio for the same period stood at 17.7 times, below the peer average of 20.5 times. The core business, especially within Diagnostics and Breast Health, showed potential for growth due to consistent demand and a significant backlog.
However, investor attention has turned to the fiscal year 2025, with official guidance expected to be released on the fourth fiscal quarter 2024 earnings call. The current consensus on revenue growth and earnings appears overly optimistic, with expectations of approximately 5.4% growth and earnings per share (EPS) of $4.41. Citi's analysis after meetings with Hologic's management in Boston suggests a more modest growth projection of 4-5% and an EPS closer to $4.30.
Several factors contribute to this tempered outlook, including an anticipated normalization in gantry placements in the second half of fiscal 2025, ongoing challenges from a stop-ship order in the Skeletal Health business, and a decline in respiratory testing revenue, encompassing both COVID and non-COVID related tests.
Despite the downgrade, Citi clarified that the downgrade does not reflect any structural issues within Hologic but is rather a response to market normalization expected to impact the company's performance.
InvestingPro Insights
To complement Citi's analysis of Hologic (NASDAQ:HOLX), recent data from InvestingPro offers additional context for investors. Despite the downgrade, Hologic's financial metrics paint a picture of a company with solid fundamentals. The company's P/E ratio (adjusted) stands at 23.0, which, when considered alongside its PEG ratio of 0.54, suggests the stock may be undervalued relative to its growth potential.
InvestingPro Tips highlight that Hologic has been aggressively buying back shares, indicating management's confidence in the company's value. Additionally, the company operates with a moderate level of debt and has liquid assets exceeding short-term obligations, which aligns with a stable financial position.
While Citi's concerns about future growth are noted, it's worth mentioning that InvestingPro data shows Hologic's revenue for the last twelve months at $3.99 billion, with a gross profit margin of 60.58%. This robust profitability could provide a buffer as the company navigates the expected normalization in demand.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Hologic, providing a deeper dive into the company's financial health and market position.
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