According to the U.S. National Cancer Institute, one in eight women will be diagnosed with breast cancer sometime during their lifetime. It's a big issue because breast cancer tends to be an aggressive form of oncology and unless it is detected early, your survival rate is slim. However, with technological advances in screening systems and a much more aware public in regards to preventive behavior, you now have a 98% survival rate when the cancer is diagnosed early and still localized to the breast.
Hologic (HOLX) has the lion's share of the U.S. mammography equipment market with a 65% share and is rapidly expanding overseas. They are also a one-stop-shop for hospitals looking to purchase diagnostic and medical imaging systems for women's healthcare that go beyond mammography with business segments in GYN Surgical and Skeletal Health. On February 11th, the FDA approved Hologic's tomosynthesis system for 3-D mammograms and this appears to be the wave of the future with competitors lagging Hologic's already impressive lead in not only market share, but technology, too. As a recent analyst report from Citigroup Global Markets states: "With tomo now approved, we believe the next closest competitor (GE) is at least 1-2 years behind.".
Citigroup Global Markets rates the stock a 'Buy' with a $24 price target on it, and they aren't alone with their positive assessment of Hologic. Out of the 26 analysts that cover Hologic, 13 have a strong buy rating, 7 have a buy and 6 say to hold the security (as reported on Yahoo Finance). The mean price target is $23/share, and, at it's current quote of $20.50, you may get a 10%-15% pop in it this year, but I am wondering if maybe it is too soon to pull the trigger on Hologic.
Hologic has a great story behind it and as CEO Robert Cascella said in the last conference call: "...tomosynthesis has the ability to do to the digital, what digital did to the analog, and that is to create a market dynamic of of technological obsolescence.". When the FDA approved 3-D imaging earlier this month, they cited two studies done by board certified radiologists that showed a 7% improvement in their ability to distinguish between cancerous and non-cancerous cases. A big improvement over the traditional 2-D systems. I agree with Mr. Cascella that more women will opt for the 3-D imaging because, let's face it, we are talking about life and death.
With a first-mover advantage, Hologic seems to have a significant head start. However, a November 26, 2010 ValueLine report claims that it will take at least 18 months after FDA approval of Hologic's 3-D imagining machines for the Medicaid and Medicare systems to create a reimbursement code for the test. In ValueLine's Febraury 25th report on Hologic, they state that it isn't until after what typically is usually a two year process for Medicaid and Medicare to make a decision on reimbursement that private insurers will follow suit. CEO Cascella uttered similar remarks in his conference call saying they were a few years away from a full roll out which should impact initial usage.
A lot can happen in two years, not only with Hologic, but also with the overall stock market. Based on valuation, Hologic to me seems fully priced with a 2011 P/E ratio of 16 and a 5 year consensus CAGR of 8.5% by the 26 analysts that cover it. That's a PEG ratio of 2 which is very expensive for even a growth stock, let alone a stock that has has not improved on the earnings front for three consecutive years. Earnings/share for 2008, 2009 and 2010 were $1.18 per year. Zero, nada, zip for earnings growth.
I realize the market is always looking ahead when pricing a stock and I don't want to spoil the show, but this stock has been buoyed by the market's ascent and, if the market has a correction, Hologic could be had for a much more advantageous price somewhere down the road, especially if it's not supposed to get in gear for two years. All of the analysts that are giving you Buy and Strong Buy signals are just sandbagging you and paying lip service. This is a good, solid company with an excellent product resumé and would be an excellent holding in any portfolio. It may even be an acquisition candidate, so if you want to dance while the music is still playing, by all means, buy it. However, if you don't want to get caught up in the hype, then a little patience is required.
Saturday, February 26, 2011
Wednesday, February 23, 2011
Veeco Instruments: What Would Peter Lynch Do?
Veeco Instruments (VECO) has had many incarnations since its founding in 1945 by two Manhattan Project scientists as the Vacuum Electric Equipment Company. In its current form, Veeco Instruments' main source of revenue is their leading position in the marketing and manufacturing of LED (light emitting diode) and solar process equipment along with a smaller percentage of their business dedicated to data storage. According to CFO David Glass in the 2010 Q4 Conference Call, 2010 was the best year in Veeco's history, and the 13 analysts that cover Veeco seem to believe that growth is in its future with an average estimate of 13.33% CAGR for the next five years as reported on Yahoo Finance. With a modest P/E Ratio of 10 and its core business segments positioned for robust growth, is this the kind of stock you want to own? On the surface, it seems like a no brainer, but let's examine the situation more closely.
With its main stream of income stemming from the solar and LED divisions, Veeco primarily resides in the semiconductor industry which is highly cyclical. Renown value investor Peter Lynch has a counter intuitive rule of thumb when investing in cyclical securities in that you buy when the P/E Ratio is high and sell when the P/E Ratio is low. Lynch's theory is that you buy when the P/E Ratio is high and the stock price is low because Wall Street has caught on to these equities, and many times has begun accumulating them before the market makes a big run and takes the stock along with it. When a cyclical security has a very low P/E Ratio with record profits, the street is anticipating a downturn and may be ready to bail on it. A good example of when looking at a high P/E, low priced stock is Veeco back in 2008.
In 2008, Veeco hit a low of $3.50 a share and had an annual average P/E Ratio of 28 with decelerating earnings and sales growth according to ValueLine. When the market began recovering in 2009, Veeco's share price had a parabolic rise, increasing ten fold to $35, then jumped again in the first few months of 2010 to $54/share. This was probably in anticipation of earnings/share increasing from $.20 in 2009 to $4.58 in 2010. It is difficult to buy at the bottom, but if you did, a ten or twenty bagger would have been a tidy profit. Even purchasing Veeco at $10, you would have made a lot of money if you would have sold at the top. This begs the questions: Is this the top and is this the right time to sell? That depends not so much on what Peter Lynch would advise, but what Uncle Sam has to say.
The solar industry is less sensitive to the economy than other cyclical sectors because it is driven predominantly by government spending. In President Obama's State of the Union address to Congress in late January, he referred to his administration's push into renewable energy as our Sputnik moment. However, any excess spending by Congress is a bit of a political football and the days of federal and state backing of the renewable energy industry may be numbered. The Senate recently agreed to extend cash grants to solar and wind power companies through 2011, but there is no guarantee that the gravy train will go on indefinitely. In fact, earlier this month Veeco was the recipient of a $4.8 million grant by the Department of Energy to help beef up their R&D efforts which may have contributed to the stock's run up back to $52 just a few trading sessions ago. This past week Veeco came back to the ground a bit, but that may have just been profit taking.
At its current valuation of $45/share, Veeco has a forward P/E Ratio of 9 and a PEG Ratio of .7 if you use an earnings growth rate of 13% like the analysts that cover it are predicting. That's a compelling appraisal for a value investor. If the government doesn't take away the punch bowl and continues to subsidise the renewable energy industry, then Veeco will probably continue to climb higher. How much higher? Who knows, but 13% CAGR is what you want in a growth company and that's not to say that the earnings rate won't go higher. Of Veeco's business, 68% goes overseas and that's in its favor, but, the industry is subsidised in foreign countries, too, and we're not the only government running up deficits. I believe that government spending on a worldwide basis is going to curtail, but that's my two cents.
If Peter Lynch were making the decisions, he probably would have sold the stock long ago, but that's only my speculation and you can't turn back the clock. The main premise for this stock is deciding what the governments will do. If you think they will keep doling out money, then by all means, stick with a solid company like Veeco. If you believe that there will be some belt tightening in the near future, then all bets are off and everybody out of the pool.
With its main stream of income stemming from the solar and LED divisions, Veeco primarily resides in the semiconductor industry which is highly cyclical. Renown value investor Peter Lynch has a counter intuitive rule of thumb when investing in cyclical securities in that you buy when the P/E Ratio is high and sell when the P/E Ratio is low. Lynch's theory is that you buy when the P/E Ratio is high and the stock price is low because Wall Street has caught on to these equities, and many times has begun accumulating them before the market makes a big run and takes the stock along with it. When a cyclical security has a very low P/E Ratio with record profits, the street is anticipating a downturn and may be ready to bail on it. A good example of when looking at a high P/E, low priced stock is Veeco back in 2008.
In 2008, Veeco hit a low of $3.50 a share and had an annual average P/E Ratio of 28 with decelerating earnings and sales growth according to ValueLine. When the market began recovering in 2009, Veeco's share price had a parabolic rise, increasing ten fold to $35, then jumped again in the first few months of 2010 to $54/share. This was probably in anticipation of earnings/share increasing from $.20 in 2009 to $4.58 in 2010. It is difficult to buy at the bottom, but if you did, a ten or twenty bagger would have been a tidy profit. Even purchasing Veeco at $10, you would have made a lot of money if you would have sold at the top. This begs the questions: Is this the top and is this the right time to sell? That depends not so much on what Peter Lynch would advise, but what Uncle Sam has to say.
The solar industry is less sensitive to the economy than other cyclical sectors because it is driven predominantly by government spending. In President Obama's State of the Union address to Congress in late January, he referred to his administration's push into renewable energy as our Sputnik moment. However, any excess spending by Congress is a bit of a political football and the days of federal and state backing of the renewable energy industry may be numbered. The Senate recently agreed to extend cash grants to solar and wind power companies through 2011, but there is no guarantee that the gravy train will go on indefinitely. In fact, earlier this month Veeco was the recipient of a $4.8 million grant by the Department of Energy to help beef up their R&D efforts which may have contributed to the stock's run up back to $52 just a few trading sessions ago. This past week Veeco came back to the ground a bit, but that may have just been profit taking.
At its current valuation of $45/share, Veeco has a forward P/E Ratio of 9 and a PEG Ratio of .7 if you use an earnings growth rate of 13% like the analysts that cover it are predicting. That's a compelling appraisal for a value investor. If the government doesn't take away the punch bowl and continues to subsidise the renewable energy industry, then Veeco will probably continue to climb higher. How much higher? Who knows, but 13% CAGR is what you want in a growth company and that's not to say that the earnings rate won't go higher. Of Veeco's business, 68% goes overseas and that's in its favor, but, the industry is subsidised in foreign countries, too, and we're not the only government running up deficits. I believe that government spending on a worldwide basis is going to curtail, but that's my two cents.
If Peter Lynch were making the decisions, he probably would have sold the stock long ago, but that's only my speculation and you can't turn back the clock. The main premise for this stock is deciding what the governments will do. If you think they will keep doling out money, then by all means, stick with a solid company like Veeco. If you believe that there will be some belt tightening in the near future, then all bets are off and everybody out of the pool.
Monday, February 21, 2011
Spanning The Globe
If you've been following this blog, you may have noticed an expansion in the type of coverage I've been giving the stock market in the past two months. Recently, I've included articles on individual securities, done book reviews and discussed investing apps for Smartphones along with my usual market coverage. This is being done for a few of reasons. Last year I published infrequently during the Summer and Fall because I thought I was being too repetitive with my market commentary and lost some traffic to the Web site. I can only go so far writing about the two ETFs in the portfolio and my belief that we are headed for a double dip if not go lower once QE2 runs its course. I enjoy writing about investing, so I'm rolling up my sleeves and will not necessarily crank out postings, but will make an attempt to do do something on a weekly basis to keep readers interested.
The catalyst for this decision was my acceptance as a contributor to the Seeking Alpha financial Web site in early January. I've been simultaneously posting this blog on their Web site since October of 2009 and wanted to see if I could crack into their network for a much larger readership. The first week of this year I submitted them an article about Apple which they found acceptable for their audience and I am indebted to them for including me as a contributor. Seeking Alpha has over 600,000 registered users that have a passion for security and market analysis and let's face it, as a writer, you want to be read. It's helped business here on Google Blogger and I'm back to getting a number of hits from the United States as well as overseas. For your convenience, you can also access The Ithaca Experiment on Facebook, too, if that is your preference. Any stocks you want covered, just send me an e-mail with your suggestion. I'll see what I can do. Thank you for your time and readership.
The catalyst for this decision was my acceptance as a contributor to the Seeking Alpha financial Web site in early January. I've been simultaneously posting this blog on their Web site since October of 2009 and wanted to see if I could crack into their network for a much larger readership. The first week of this year I submitted them an article about Apple which they found acceptable for their audience and I am indebted to them for including me as a contributor. Seeking Alpha has over 600,000 registered users that have a passion for security and market analysis and let's face it, as a writer, you want to be read. It's helped business here on Google Blogger and I'm back to getting a number of hits from the United States as well as overseas. For your convenience, you can also access The Ithaca Experiment on Facebook, too, if that is your preference. Any stocks you want covered, just send me an e-mail with your suggestion. I'll see what I can do. Thank you for your time and readership.
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