Beyond Covid: 2 Plays in Medical Diagnostics

12/07/2020 5:00 am EST

Focus: HEALTHCARE

Richard Moroney

Editor, Dow Theory Forecasts

Richard Moroney is a leading growth stock expert and editor of Dow Theory Forecasts, a financial newsletter that has been continuously published since 1946. Here, he looks at two medical diagnostics stocks which both earn the service's long-term buy rating.

The coronavirus pandemic has been a boon to Thermo Fisher Scientific (TMO). The company has developed diagnostic tests for the virus, while working with drug makers on more than 200 coronavirus vaccines and treatments.

As a result, Thermo Fisher grew earnings per share 63% and revenue 23% for the six months ended September, while operating cash flow more than doubled.

On Dec. 1, management said it now expects $2.4 billion in coronavirus-related revenue in the December quarter, up from its prior target of $1.75 billion. Activity is also picking up for Thermo Fisher’s base business, with sales growth now expected to be in the mid-single-digits.

Not surprisingly, Thermo raised its target for total revenue growth to 40% for the quarter, above the consensus estimate of 24% growth at the time of the announcement.

The stock’s 2021 estimates have steadily risen over the past 90 days, with the consensus projecting 8% growth for both earnings per share and revenue.

Hologic (HOLX) shares have rallied 36% in 2020, as demand for coronavirus tests is offsetting weakness in other areas hurt by the drop in medical procedures.

Hologic doubled its diagnostics-production capacity in just six months this year. Last quarter, half of Hologic’s 50 million molecular-diagnostics tests were for the coronavirus.

Although the Covid business won’t last forever, Hologic has shipped a broader range of testing systems in 2020 at double the run rate from recent years. Its pipeline is also paying off — in December, U.S. regulators cleared Hologic to sell new software that uses artificial intelligence to help doctors detect breast cancer.

Admittedly, Hologic’s recent growth is unlikely sustainable after the pandemic ends, with the consensus projecting 71% higher earnings per share for fiscal 2021 ending September, followed by a 33% drop in fiscal 2022.

But the stock trades at just 18 times trailing earnings, versus its five-year median of 44 and its industry median of 41 for S&P 1500 Index health-care equipment stocks. Hologic receives a rank of 97 for Quality, consistently the most effective Quadrix category for healthcare stocks over the past decade.

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