Varian Doesn’t Vary

11/10/2008 12:00 pm EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says a leading medical equipment company is cushioned against the worst of the recession.

Varian Medical Systems (NYSE: VAR) is the leading maker of advanced equipment and software products used in radiation cancer therapy. Customers include hospitals, cancer treatment clinics, universities, government institutions, health care agencies, and doctor’s offices.

Oncology Systems, which was responsible for 81% of Varian’s fiscal 2008 sales, makes, sells and services hardware and software products used in cancer radiation treatment.

Products include linear accelerators, treatment/verification products, information management, and treatment planning software, and advanced brachytherapy products. These allow customers to conduct both conventional and advanced radiotherapy treatments, including intensely modulated radiation therapy (IMRT) and image-guided radiation therapy (IGRT).

X-Ray Products, which comprised 15% of fiscal 2008 sales, manufactures X-ray imaging components and subsystems. Offerings consist of X-ray tubes and flat panel detectors. The former is used in computed tomography (CT), scanning, radioscopic/fluoroscopic imaging, mammography, and other medical and industrial applications.

[Flat-panel detectors] are used to capture X-ray images digitally and serves as an alternative to traditional image intensifier tubes and X-ray films. VAR also has several smaller businesses, which were responsible for [around 5%] of fiscal 2008 sales.

Despite VAR’s more recession-resistant operations, it has not been spared from the deteriorating economy. Based on continuing operations, year-over-year revenue [growth averaged 19.2% to $1.48 billion,] and net income growth averaged 27.7% [to $1.63 per share] through the first three quarters of fiscal 2008, (which ended September). Revenue growth slowed to 14.8% in the fourth quarter.

While the operating margin improved 87 basis points to 22.88% in the quarter, a higher tax rate led to just a 9.1% rise in net income from continuing operations to 68 cents per share.

Fortunately, VAR’s recession-resistant nature is more apparent in its near-term outlook. While many firms are forecasting lower revenue and profit levels in the periods ahead, VAR expects earnings from continuing operations in 2009 to grow by 12% to 14% to $2.58 to $2.63 per share. Furthermore, this is based on a 10% to 13% expected rise in revenues, suggesting profit margins will remain stable or even expand.

Deteriorating economic conditions could hamper VAR’s ability to meet these estimates. But order activity remained healthy with a book-to-bill ratio of 1.2 in the fourth quarter. The company ended fiscal 2008 with record backlog of $1.89 billion, up 14% from the previous fiscal year. VAR’s healthy balance sheet, with nearly $400 million in cash and just $40 million in total debt, also affords plenty of options to further enhance shareholder value through complementary acquisitions or share repurchase activity. The expected divestiture of ACCEL’s research instruments business should also allow VAR to focus more on the promising proton therapy business.

(The stock closed above $43 Friday, and trades at less than 17x projected fiscal 2009 earnings estimates of $2.58 per share—Editor.)

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