Here’s Why Morgan Stanley Rated Hologic Outperform

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In a report issued on Wednesday, Morgan Stanley (NYSE:MS) began its coverage on the medical equipment manufacturer Hologic (NASDAQ:HOLX) with an outperform rating and a $26 price target on the stock.

“We see a clear path to peer-leading earnings growth over the next 3 years and valuation offers an attractive risk-reward outlook with limited downside risk,” said Morgan Stanley in the report.

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Several other equities research analysts have recently issued reports on the company as well.

In a note to investors on Monday, September 24, analysts at Canaccord Genuity raised their price target on Hologic from $23 to $27 and placed a buy rating on the stock. Analysts at Jefferies Group also gave the stock a buy rating in a research note to investors on September 21, while analysts at Zacks reiterated a neutral rating on September 13 and gave the stock a $21 price target.

When Hologic released earnings data for the last quarter, on July 30, the company reported an earnings per share of $0.35, a single cent more than the Thomson Reuters consensus estimate. Also, the company’s quarterly revenue increased by 4.2 percent over the same quarter last year. Analysts now predict that Hologic will report earnings per share of $1.38 for the current fiscal year.

In an article posted on Seeking Alpha, following the company’s release of its third fiscal quarter earnings in July, the market analysis publication deemed the stock to be a “little underrated.” Because revenue in the company’s key business, breast health, rose just three percent, Wall Street analysts were disappointed with the company’s results. The health industry’s trend towards recommending fewer mammograms than previously has put a dent in profits. Also, Hologic’s new 3D mammography system, which improved only slightly over the older 2D system, left buyers skeptical whether the new system was worth the added cost. Furthermore, General Electric (NYSE:GE) and Siemens (NYSE:SI) are only a few years away from entering the market and adding additional competition.

However, analysts saw potential with Hologic’s purchase of Gen-Probe. Even though the deal increases the company’s high yield component of its debt package, it also eliminates a  threat to Hologic’s HPV testing business and brings in high-quality molecular STD testing capabilities. Specifically, the acquisition will make Hologic more competitive with other medical technology companies like Qiagen (NASDAQ:QGEN) and Becton Dickinson (NYSE:BDX).

While in July, Seeking Alpha noted a trend towards undervalued medical technology stocks, stating that Covidien (NYSE:COV), St. Jude Medical (NYSE:STJ), and Hologic were all undervalued relative to their fair values by 30 percent, with Morgan Stanley giving Hologic an outperform rating that no longer is the case.

Hologic will release its fiscal fourth quarter operating results on November 12 after market close.

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