Over the past six months, Hologic’s stock price fell to $65.75. Shareholders have lost 17.6% of their capital, which is disappointing considering the S&P 500 has climbed by 6.4%. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Hologic, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why we avoid HOLX and a stock we'd rather own.
Why Is Hologic Not Exciting?
Founded in 1985, Hologic (NASDAQ:HOLX) develops diagnostic, medical imaging, and surgical solutions focused on women’s health, diagnostics, and gynecologic surgical products.
1. Declining Constant Currency Revenue, Demand Takes a Hit
Investors interested in Medical Devices & Supplies - Imaging, Diagnostics companies should track constant currency revenue in addition to reported revenue. This metric excludes currency movements, which are outside of Hologic’s control and are not indicative of underlying demand.
Over the last two years, Hologic’s constant currency revenue averaged 3.7% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Hologic might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Analyzing the trend in its profitability, Hologic’s adjusted operating margin decreased by 18.3 percentage points over the last five years. This raises an eyebrow about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 30.3%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Hologic’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Hologic isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 14.9× forward price-to-earnings (or $65.75 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Would Buy Instead of Hologic
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