GPRO GoPro Inc

Following the announcement of Hologic’s (HOLX) second quarter of fiscal 2012 results and the proposed acquisition of Gen-Probe (GPRO) on April 30 2012, analysts have lowered their estimates for the forthcoming quarters.

Previous Quarter Highlights

Hologic reported a loss per share of 15 cents in the second quarter of fiscal 2012 compared with earnings per share (“EPS”) of 31 cents in the year-ago period. After taking into account certain one-time items in both the periods, adjusted EPS came in at 33 cents, in line with the Zacks Consensus Estimate and ahead of the year-ago quarter’s 30 cents. Among several adjustments, adjusted EPS in the reported quarter excludes charges of $18.3 million related to the write-off of certain assets as a result of the company's decision to cease commercialization of Adiana.  The decision to discontinue Adiana was taken as it was not found to be commercially viable.

Revenues were $471.2 million, an increase of 7.4% year over year driven by growth across all segments. However, revenues were short of the Zacks Consensus Estimate of $474 million and came in on the lower end of the company’s guidance of $470–$475 million.

Hologic also announced its decision to acquire all outstanding shares of Gen-Probe, a player in the field of molecular diagnostics, for $82.75 per share in cash, or a total enterprise value of approximately $3.7 billion. The deal will be funded through available cash and additional financing of term loans.

Hologic provided its guidance for the third quarter of fiscal 2012. For the said quarter, the company expects to report $475−$480 million of revenues (representing annualized growth of 5−6%) resulting in adjusted EPS of 34 cents, a penny short of the then Zacks Consensus Estimate. The revenue estimate was behind the consensus estimate of $482 million. For fiscal 2012, Hologic still expects to report revenues of $1.9−$1.925 billion (growth of 6−8%) and adjusted EPS of $1.36−$1.38.

For a full coverage on the earnings, read: Hologic Incurs Loss, Eyes Gen-Probe

Agreement of Analysts

The brokerage community seems to be apprehensive of Hologic’s merger plans with Gen-Probe citing integration issues that can emerge in big M&A deals. Over the last 30 days, 9 of the 18 analysts covering the stock have lowered their estimates for the third quarter of fiscal 2012, with no positive revisions. For the current fiscal, 6 analysts have lowered their estimates with only one upward revision. Although Hologic expects the combined company to yield $75 million in cost synergies within three years, no further details were provided.

Another area of concern is the high leverage, which now stands at 5.3. Hologic however expects to utilize strong cash flow from operations, of the combined company, to bring down the leverage to the pre-transaction debt level within three years. However, if sales of the new products fail to meet estimates, the company’s performance will be adversely affected.

Magnitude of Estimate Revisions

Based on negative revision trends, the consensus estimate for the third quarter has dropped by a penny to 34 cents in the past 30 days. The consensus estimate for fiscal 2012 also declined by a penny to $1.37 over the last 30 days, indicative of market pessimism surrounding several issues related to the Gen-Probe deal.

Neutral on Hologic

Offering a wide range of products, Hologic has become an industry giant in the field of women’s health. Moreover, the proposed acquisition of Gen-Probe will bring with it a strong molecular diagnostics segment with special focus on women’s health. Besides, the company will have access to Gen-Probe's molecular diagnostic platforms of Tigris and Panther systems along with a wide portfolio of tests. While the deal should add value over the long term, the company would come up against several near-term challenges.

Sales of Dimensions continued to gain traction and are expected to be an important growth driver for the Breast Health segment. Given the current status (35% accomplished till date and targeting 60% at the end of the current fiscal), the company is confident of being able to achieve the target of placing 500-700 3D systems in the US within the first two years of approval. While we are concerned with Hologic discontinuing Adiana, we are encouraged by the reiteration of the 2012 guidance.

Over the long term, we have a Neutral recommendation on Hologic. The stock remains a Zacks #3 Rank (Hold) in the short term.

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