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Weak Guidance Leads to Hologic Downgrade

NEW YORK (GenomeWeb News) – Following Hologic's announcement that its Fiscal Year 2014 revenues will be down year over year, investment firm William Blair today downgraded the firm's stock to Market Perform from a previous rating of Outperform.

Analyst Brian Weinstein also reduced his revenue and earnings estimates for Hologic for FY 2014.

After the close of the market on Monday, Hologic reported a 6 percent uptick in its FY 2013 fourth quarter revenues. The Bedford, Mass.-based firm also said that for FY 2014, revenues are anticipated to be down between 1 and 3 percent, short of what some analysts had been expecting and leading to Weinstein's downgrade.

In a research note, he wrote that comments made by Hologic earlier in the quarter had led analysts to believe revenues would be flat to up in the "very low single digits as financial and operating leverage combined for some modest acceleration in earnings over the revenue growth rate.

"Unfortunately, management is now pointing to a macro-induced revenue deceleration in the low single digits, with earnings expected to be down almost 10 percent year over year, and calling 2014 'a year of change,'" he said.

In addition to the downgrade, Weinstein also trimmed his revenue and earnings estimates for the firm. For FY 2014, he lowered his revenue estimate to $2.44 billion from an earlier estimate of $2.55 billion and cut the adjusted EPS estimate to $1.35 from $1.59.

Weinstein noted that in recent months he took out about $200 million of high-margin revenue "that will cost shareholders $.40 per share in earnings versus where expectations were for 2014," and that for FY 2015, revenue growth is anticipated to "return to only the low- to mid-single digits based on easing comps, more so than anything fundamental that management is able to do at this time to stem the tide."

During the fiscal fourth quarter of 2013, Hologic wrote down $1.11 billion related to its Diagnostics segment. According to Weinstein, the impairment charge indicates that growth from the company's molecular diagnostics acquisitions — Gen-Probe and Third Wave — is expected to be lower moving forward "despite bullish Gen-Probe commentary in the near term."

On the Gen-Probe business, he said that synergies from the acquisition have "come in faster than originally expected," and that the business has a product cycle before it "that should begin to add to revenues in the next couple of quarters," resulting from Hologic's deal with Quest in June covering women's health.

"This is no longer as meaningful," however, Weinstein said, "given that the majority of synergies have already been incorporated, though the product cycle is still playing out."

Hologic is in the midst of an organizational transition that includes the return of Jack Cumming to lead the firm. Cumming, who was Hologic's CEO between 2001 and 2009, replaced Rob Cascella as president and CEO during the summer.

In August, during the company's fiscal third quarter earnings conference call, Cumming laid out three short-term goals for Hologic that included a strategic business review to ensure that its resources are "aligned with the best opportunity for the company's long-term success."

Also, new managers were named to develop strategies to enhance the company's revenue and accelerate product development, and Hologic's capital allocation strategy was being reviewed in order to return cash to shareholders and repay its debt.

In addition to Weinstein, other analysts also trimmed their expectations for Hologic going forward. Goldman Sachs' Isaac Ro maintained a Buy rating on the company's shares but lowered his six-month price target to $22 from $25, and said that the weak guidance for FY 2014 "raises questions that require further due diligence. While the disappointing guidance may act as a clearing event, it was weak even against muted expectations."

He also reduced his FY 2014 sales estimate to $2.48 billion from $2.74 billion and cut his EPS estimate to $1.38 from $1.77.

ISI Group's Vijay Kumar, meanwhile, lowered his FY 2014 EPS to $1.35 from $1.60 and trimmed his price target to $25 from $26. He maintained a Strong Buy rating for Hologic, though, saying the company still has strategic value.

"While the business headwinds are far greater than we had originally anticipated, we continue to believe that a potential sale of assets is a distinct possibility," he said in a research note. "We think an outright sale of the entire company is the right strategy to pursue if there are, in fact, buyers capable of digesting the entire asset. … If there are no buyers of the entire asset … we look for sizeable asset sales and a broad restructuring."

In afternoon trading on the Nasdaq on Tuesday, Hologic was down 15 percent at $19.55.

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