Rudd: Can former 'ugly duckling' Hologic become a swan?

In the story of "The Ugly Duckling" by Hans Christian Andersen, a homely little bird matures into a graceful swan. The story comes to mind once again because of Hologic, Inc., a company that was an "ugly duckling" a year ago. The question is will it soon spread its wings as graceful swan? Perhaps...see what you think.

Hologic operates in four segments: diagnostics (48 percent of sales), breast health (36 percent), surgical (12 percent), and skeletal health (4 percent). The first segment has increased steadily, with a growth of nearly 100 percent and this is likely to continue. The company controls about 65 percent of the domestic digital mammography market. It is also a major player in the development of the first 3-D mammography platform approved by the Food and Drug Administration.

After the Gen-Probe acquisition, a leading maker of molecular diagnostic products, Hologic also holds the top position in a host of diagnostic tests catered to women's health that run solely on its proprietary instrumentation.

My non-GAAP 2014 earnings projection a year ago was $1.60 per share, with a 12-month projected share price of $23.95, representing a capital gain of 17 percent over the then current price of $20.47. So how did Hologic do? Non-GAAP earnings were $1.51, a bit lighter than my estimate, while the shares closed recently at $26.40 for a 29 percent capital gain. However, given the miss in earnings, should you continue to watch the stock?

Yes, I believe so when you consider that Hologic recorded fourth quarter net income of $28.2 million or 10 cents per share, registering a massive improvement over the net loss of $1,113.9 million or $4.11 per share reported in the prior-year fourth quarter.

Full-year 2014 adjusted net income was $1.51 per share, as compared to year-ago net income of $1.50 per share. Full year revenues of $2.53 billion exceeded the company's guidance of $2.50 to $2.51 billion. The year-over-year improvement was due to revenue growth across all its four of the company's business segments.

Hologic exited its fourth quarter with cash and cash equivalents of $741.6 million compared with $829.4 million at the end of fiscal 2013. Total long-term debt as of September 27, 2014 was $4.15 billion, down 2.1 percent year over year.

In its forward guidance for 2015, Hologic indicated it expects revenue growth of approximately 2 to 3.5 percent over fiscal 2014. Taking into account an expected 1 percent negative impact from foreign currency, the company is still projecting growth of approximately 1 to 2.5 percent.

The net result is estimated revenues of between $2.54 billion and $2.57 billion. Meanwhile, adjusted earnings per share are projected to be in the range of $1.50 to $1.54, reflecting year-over-year growth of between 3 and 5.5 percent.

If you decide Hologic is worth watching, you will not be alone. Goldman Sachs recently added Hologic to its Conviction Buy list, raising its price target from $30 to $33.

In early-November, the research firm Jefferies, Inc., reiterated its Buy rating on the stock and elevated its price target from $30 to $31.

In November 2013, Carl Icahn reported a 13 percent stake in the company, stating that the stock was undervalued. Icahn's position, which comprises more than 34.1 million shares, has remained unchanged since it was first initiated.

During the third quarter of 2014, Renaissance Technologies raised its exposure to Hologic by 66 percent to 1.5 million shares. Also betting on the healthcare company is Soros Fund Management, which last disclosed ownership of more than $164 million of Hologic bonds after upping its ownership by 8 percent in the third quarter.

The intrinsic value of the shares using a discounted earnings model is not applicable due to negative GAAP earnings. However, the free cash flow to the firm model yields a result of $44 per share. My 12-month earnings estimate is $1.65 per share with a 12-month price target of $30 per share for a capital gain of 15 percent. So from where I sit it appears we have a beautiful swan in the making.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 10 AM and 3 PM EST at (941) 706-3449.