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Morningstar | HOLX Updated Forecasts and Estimates from 02 May 2019

Narrow-moat Hologic’s fiscal second-quarter results slightly exceeded our expectations on the top line, but also trailed our estimates on the bottom line. We’re holding steady on our fair value estimate as our minor adjustments weren’t material enough to shift our valuation. Most significantly, diagnostics and breast health--the two largest businesses--both saw strong growth in the quarter at 7.8% and 8.4% in constant currency, respectively. In particular, Hologic’s molecular diagnostics product line grew 13% in constant currency year over year thanks to increasing utilization of the automated Panther system. Overall, we think the firm is doing a better job of blocking and tackling in the breast health and diagnostics segments. We expect Hologic to sustain steady growth in these areas aided by innovation, strong clinical data that supports the firm’s 3D mammography, and a secular tailwind coming from the consistent rise in sexually transmitted diseases that we saw take hold in 2013.

After adjusting for the impairment write-off, quarterly operating margin came in at 15%, which is slightly lower than we’d projected for the year, but this should climb through the rest of the year as inventory reserves and scrap charges roll off, complemented by the consolidation of international operations for medical aesthetics.

As for the impairment write-off, this gets to the biggest beef we’ve had with Hologic. This quarter’s write-off of $444 million comes on the heels of the $732 million written off last year--all of it related to 1.65 billion Cynosure purchase. Over the last decade, the firm has made three expensive acquisitions, followed by substantial impairment write-offs. We note that each episode took place under a different management team. Nonetheless, shareholders should be aware of this well-established pattern at Hologic because it could cost them.