Health Trends Favor Varian

3/15/2010


  Recent Price
$53
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
19
  Shares (millions)
125
  Long-Term Debt as % of Capital
2%
  52-Week Price Range
$53.27 - $27.39

Varian Medical Systems ($53; VAR), one of the largest makers of cancer-treatment products, X-ray tubes, and imaging systems, maintained double-digit earnings gains throughout the recession. Profit growth should accelerate as the economy improves and hospitals start spending more. The stock isn’t particularly cheap at 19 times trailing earnings but seems reasonably valued compared to its growth potential. Varian is a Buy and a Long-Term Buy.

Business breakdown

About half of Varian’s revenue comes from North America, with 28% from Europe and 19% from Asia. In the past year, the company notched its biggest sales gains in Asia.

Varian operates three business segments. Oncology systems (81% of 12-month sales) posted 7% higher revenue over the past year. Products include software and equipment for radiation therapy. Linear accelerators treat tumors with high-energy X-rays, while RapidArc software helps customize radiation streams to take the shape of the tumor.

Sales of X-ray products (15% of sales) rose 5% over the past year. The company makes tubes that generate X-rays for CT scanners, special medical procedures, and mammography. Sales growth slowed as clients reduced inventory levels, and Varian says the market for new imaging equipment remains weak, especially in the dental and veterinary segments.

Industrial X-ray scanning accounts for less than 4% of Varian’s revenue. These detectors scan trucks and containers for hazardous materials, mostly at international borders.

Varian is not without risks:

Demand from hospitals may not rise quickly.

Uncertainty over health-care reform could delay purchases of capital equipment.

Weak order trends could translate to weak sales in the year ahead, though the $2 billion backlog, up 4% from a year ago, offers some cushion.

However, Varian has a big stake in a grim growth market. Deaths related to cancer are projected to rise more than 50% to 12 million a year worldwide by 2030, according to the World Health Organization.

RapidArc and international demand for low-end cancer-treatment equipment should drive near-term growth. Varian is seeing more orders from overseas. Hospitals currently spend based on budgets drawn up in the depths of the recession, and Varian expects purse strings to loosen in the year ahead.

Conclusion

For fiscal 2010 ending September, management raised its guidance for per-share profits to a range of $2.76 to $2.83, up 4% to 7%. But even this new outlook could prove conservative. The consensus has risen to $2.83, and Varian has a history of exceeding profit expectations.

Few large health-care-equipment companies are valued so attractively relative to their profit-growth potential. Shares trade at 18 times estimated year-ahead earnings, 14% below the five-year average forward P/E ratio. The PEG ratio, or the forward P/E ratio divided by the long-term estimated growth rate, is 1.28, versus an average of 1.43 for the S&P 500 Index’s health-care-equipment stocks. An annual report from Varian Medical Systems Inc. is available at 3100 Hansen Way, Palo Alto, CA 94304-1038; (650) 424-5834; www.varian.com.

VARIAN MEDICAL SYSTEMS
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Dec '09 $0.63 vs. $0.56 + 6% $47.78 -

$38.71

18 - 15
Sep '09 0.78 vs. 0.68 + 8% 44.53 - 31.21 17 - 12
Jun '09 0.68 vs. 0.61 + 0% 38.31 - 29.53 15 - 12
Mar '09 0.64 vs.

0.56

+ 7% 39.77 - 27.10 17 - 11
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $2.21 $2.65 $0.00 $59.15
-
$27.10 22 - 10
2008 $2.07 $2.31 $0.00 65.84
-
40.22 29 - 17
2007 $1.78 $1.83 $0.00 56.00
-
37.30 31 - 20
2006 $160 $1.65 $0.00 61.70
-
36.55 37 - 22
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
95 84 61 96 96 63 60

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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