Let´s start looking at the "big picture." The Health Care Equipment sub-industry will remain strong due to the increasing age of the population. Also, two important factors to consider are the increase in the industry's clientele, and the ability to manage this new clientele in a more efficient way, with improved technology and better health care equipment. With this promising outlook, let's take a look at Icahn´s last trade and try to explain to investors the reasons of this appealing investment opportunity.
On Nov. 11, Carl Icahn bought Hologic Inc. (HOLX), a company that develops, manufactures, and markets x-ray systems. It operates through four segments: Diagnostics, Breast Health, GYN Surgical and Skeletal Health.
Good Deal
On Aug 2012, the company acquired Gen-Probe, a leading maker of molecular diagnostic products. The deal will generate cost synergies of over $40 million in the first year and about $35 million at 2015. The Diagnostics products segment (36% sales of fiscal year 2012) has reported a strong increased, with a growth of nearly 100% and we expect much more upside potential in this segment. Additionally, we think Gen-Probe´s products to penetrate regions with good prospects to grow like in the BRIC countries.
Conversion from Analog to Digital
In Jan 2003 the firm sold its first FDA-approved digital mammography system in the U.S. Due to the rapid growth in the digital mammography category, digital platforms became very popular and demanded. A potential upside driver include faster than expected tomosynthesis adoption. Tomosynthesis is a new technology to produce (3D) images. The firm was the first to offer a 3D digital system in the U.S. taking advantage over a number of competitors, such as General Electric, Agfa, Siemens, Philips and Johnson & Johnson.
Valuation
In terms of valuation, its price-to-book ratio of 2.05 indicates a discount versus the industry average of 2.79 and the price-to-sales ratio of 2.47 is below the industry aver! age of 2.5. The company announces a $250M repurchase plan that covers the next three years. Management reiterated its focus on return on invested capital and its intention to pay down debt while returning cash to shareholders.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness.
Final Comment
Hologic´s revenue growth has outpaced the industry average of 6%. I expect this trend to continue aided by new products, expansion into emerging markets, and strategic acquisitions. Despite of having found a major weakness in the result of ROE, the firm has other highlights as its revenue growth seen before and the increase in stock price during the past year.
For a long-term perspective, I would advise fundamental investors to consider adding Hologic to their portfolios as it seems to starting gaining a leading position in the market.
Hedge fund managers have also been active in the company. Hedge fund gurus like Jim Simons, Steven Cohen, Paul Tudor Jones and Jean-Marie Eveillard have invested in it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
Also check out: Carl Icahn Undervalued Stocks Carl Icahn Top Growth Companies Carl Icahn High Yield stocks, and Stocks that Carl Icahn keeps buying
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