This article was published for PropThink’s Premium members on Friday, November 22.
Hologic (HOLX) gapped up last Thursday morning after activist investor Carl Icahn reported a 12.63% stake in the $6 billion diagnostic company. The move comes after Hologic’s fiscal 2014 guidance for earnings of $1.32-1.38 per share came in well below Street estimates and the stock sank. While much of the Street is calling Icahn’s position and the stock’s subsequent performance an opportunity to take some profits, we believe this is a real turnaround story. Like our suggestion to buy Endo Health (ENDP) late last year when there was “blood in the streets” (the stock has almost tripled in value since), we’re taking the counter-consensus approach with HOLX and suggest owning the stock as, we suspect, the board and management make a significant shift to create value where the market is missing it.
Hologic is a supplier of diagnostic, surgical, and imaging products, primarily related to women’s health. Make no mistake, this is not currently a growth story (which is creating the opportunity) but could take patience. We’re optimistic that Mr. Icahn directing the board will be able to realize value through strategic divestitures, deleveraging, and cost-cutting, positioning the company for growth off of a much smaller base – forward-looking investors will be willing to attribute a higher “growth” multiple to this story despite a 1-2 year timeframe before revenue/earnings truly materialize. Many HOLX bulls threw in the towel with the guidance dip early this month, which leads us to suspect that a new shareholder base, one focused on the potential for a turnaround and an eye on growth, has come into the stock. That facet, a value-focused shareholder base, should limit downside risk as they’ll be willing to wait out this time of change.
Recall our coverage of Endo, which we called a buy late last year after repeat earnings misses and a sliding stock price. We suggested that new management would go a long ways towards creating value, despite headwinds from generic competition and a highly leveraged balance sheet. Endo subsequently brought in former Valeant (VRX) star Rajiv De Silva, who has sold off assets, brought in new ones, and most recently improved the company’s tax rate with the purchase of Canadian specialty pharma company, Paladin Labs. It’s these creative approaches that we suspect could come into play at Hologic in the next year, and Icahn/fellow activist firm JANA Partners buying into the name speaks volumes to our assertion that there may be important oversight changes to come.
We note that in his 13D filing, Icahn indicates “the possibility of shareholder board representation,” which is certainly not abnormal for Icahn, who has a legendary career as a corporate raider. The turnaround at Netflix was in-part a product of Icahn’s board insertion, and resulted in significant shareholder gains. For investors interested in how Hologic could play out, take note of Boston Scientific (BSX), a turn-around situation quite similar to Endo Health and what we suspect will be the case at Hologic. BSX has doubled since the company brought in new management – CEO, Michael Mahoney and CFO Jeffrey Capello. Investors largely credit Capello with the financial savvy around the BSX turnaround. Interestingly, note that Capello resigned from BSX in October with no details given as to the reason; word on the Street is that he may be tapped for the same position at HOLX. The timing of his BSX departure certainly supports the rumor.
Ultimately, the stage is set for good things. We see a perfect recipe for a quality, long-term turnaround: a management team that’s open to change, activist investors, and a patient-money shareholder base that recognizes this is a value story. Hologic has its annual shareholder meeting this coming March, but nominations for the board are due by December 5, and speculation on the Street as to Icahn’s nominations could begin to work in the stock. Shortly after the nominations are made, any proposed slate of Icahn directors should become public as proxies are delivered to investors. The escapades of corporate raiders have captivated audiences on the silver screen, and we think HOLX is an interesting and long-term opportunity for individuals to join the cause with this legendary activist investor.