The Zacks Analyst Blog Highlights: Berkshire Hathaway, Hologic, Qiagen and Abbott Laboratories

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Jun 21, 2011, 09:30 ET

CHICAGO, June 21, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Berkshire Hathaway Inc. (NYSE: BRK.A), Hologic (Nasdaq: HOLX), Qiagen (Nasdaq: QGEN) and Abbott Laboratories (NYSE: ABT),

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Here are highlights from Thursday's Analyst Blog:

Berkshire Downgraded to Neutral

We are downgrading our recommendation on the shares of Berkshire Hathaway Inc. (NYSE: BRK.A) to Neutral from Outperform based on heavy catastrophe losses (cat losses) incurred during the first quarter of 2011 and the expectation of more cat losses from hurricanes during the second half of the year, which will likely weigh on the insurance segment's bottom line.

Berkshire's property and casualty insurance business has been the engine behind its growth. Berkshire's insurance business (which accounted for approximately 40% of the company's 2010 operating income) maintains capital strength at exceptionally high levels. This strength differentiates Berkshire's insurance companies from their competitors. Collectively, the aggregate statutory surplus of Berkshire's U.S. based insurers was approximately $94 billion at year end 2010, up from $64 billion at 2009 end.

All of Berkshire's major insurance subsidiaries are rated "AA+" by Standard & Poor's and nearly all are currently rated "A++" (superior) by A.M. Best, with respect to their financial condition and operating performance. Its insurance business has been able to increase float (money held between the time when policyholders submit payment and when funds are eventually paid out to settle claims) to $65 billion from $28 billion over the past decade. This float has been effectively used by Warren Buffett to make profitable investments. Given Berkshire's sound underwriting practices, we believe its insurance companies are capable of generating significant float in the future.

However, due to catastrophe losses of $1.7 billion caused by the earthquakes in Japan and New Zealand, as well as cyclone and floods in Australia, the subsidiaries of Berkshire Hathaway Reinsurance Group and General Re suffered massive underwriting losses. Moreover, since catastrophe activity is expected to remain at high levels during the second half of the year (June to December), the company might even face additional cat losses, which, in turn, might keep insurance segment results under pressure.

Berkshire's economically sensitive non-insurance businesses – utilities & energy, and manufacturing, service & retail – are eventually headed for a recovery after a sharp earnings decline in 2009 due to the weak economy. The utilities and energy business is supposed to bring key growth with increased revenues expectation from BNSF, the railway which Berkshire acquired in February 2010. During the first quarter, revenues from BNSF increased more than twice year over year. According to Buffett, railroads represent the future and it is bound to grow with growth in population and GDP. He expects that this railroad will increase Berkshire's normal earning power by nearly 40% pre-tax and by well over 30% after-tax.

Berkshire believes that demand for utilities will be strong in future and drive significant earnings growth for the company. Total revenue for manufacturing, service & retail increased 7.8% in the first quarter, reflecting improved results across most of the units due to better economic conditions and higher consumer demand.

However, the major concern about Berkshire remains its succession plan. The remarkable success of Berkshire Hathaway is nearly wholly attributable to Warren Buffett and Charles Munger. Though Buffett has put in place a succession plan, there remains a lack of clarity with respect to it. In our view, it is quite likely that Berkshire's exceptional performance will deteriorate under a new management. It is simply statistically improbable that any new management of this behemoth conglomerate will be able to successfully continue Buffett and Munger's long-term market out-performance.

Hologic Wins the Gold

In a major achievement, Hologic (Nasdaq: HOLX) won a gold Medical Design Excellence Award (MDEA) award for its Selenia Dimensions 2D/3D mammography system. MDEA, organized by the leading business-to-business media company UBM Canon, is a premier awards program that recognizes the achievements of medical devices manufacturers.

In the past, Hologic has received the gold MDEA award thrice – the Sentinelle Vanguard breast imaging and interventional coil in 2010, ThinPrep imaging system in 2004 and MammoSite radiation therapy system in 2003.

In February 2011, Hologic received approval from the US Food and Drug Administration (FDA) for its Selenia Dimensions three-dimensional (3D) digital mammography tomosynthesis system. Selenia has been developed on the Dimensions platform utilizing tomosynthesis technology to produce both 3D and the conventional two dimensional (2D) full field digital mammography (FFDM) images. The images can be used to screen and diagnose breast cancer. The product is already approved for providing 2D images. The Dimensions platform had received CE mark approval in Europe in fiscal 2008 and Canadian registration in March 2009, both for 2D and 3D modes of imaging.

Although a patient's exposure to radiation would increase, the accuracy of detection of the disease is better with a combination of both 2-D and 3-D images. Following its approval, the product was immediately launched in the US. There are 12,000 mammography systems running in US consisting of 9,000 digital and 3,000 analog. Since approval, the company has upgraded a number of domestic systems and is pleased with the early uptake so far although adoption of the product will come about gradually. Consequently, a rapid ramp up in system sales is not expected this year.

Approval of the product will be of great help to the huge patient population. It is estimated that more than 40,000 women in America died from breast cancer in 2009. The stage at which the cancer is detected is significant as it is the right time to take medical recourse to increase woman's survival.

With a wide range of products, Hologic has become an industry giant in the field of women's health products. Although the Diagnostics segment has been suffering for the past few quarters due to lower doctor visits owing to economic uncertainty, the situation is gradually stabilizing. Moreover, the company is also undertaking several steps, including acquisitions, international expansion and product development to bolster its top line. The company also faces stiff competition from players such as Qiagen (Nasdaq: QGEN), Abbott Laboratories (NYSE: ABT), among others.

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