Zacks_Analysts' Blog : Earnings Preview: Varian Medical - Analyst Blog

Varian Medical Systems (VAR) is slated to report first-quarter fiscal 2012 results on Wednesday, January 25. The current Zacks Consensus Estimate for the first quarter is 76 cents, representing an estimated year-over-year decrease of 4.81%.

Fourth Quarter Recap

Varian reported fourth quarter earnings per share from continuing operations of 95 cents, missing the Zacks Consensus Estimate by a couple of cents while surpassing the corresponding year-ago earnings of 87 cents.

Varian’s top line witnessed a 10% increase to $719 million in the quarter, but trailed the Zacks Consensus Estimate of $735 million. Order backlog increased 15% to $2.5 billion at the end of the reported quarter. Growth was led by increase in demand for newer products of both Oncology Systems and X-Ray segments.

Oncology Systems’ revenues grew 7% year over year to $549 million. Varian benefited from strong demand for its TrueBeam system.

Varian’s X-Ray Products business had a strong quarter with revenues moving up 11% year over year to $119 million. Sales in the “Other” category spiked 53% year over year to $51 million.

Estimate Revision Trend

Agreement

Among the 13 analysts covering the stock, there were no estimate revisions, for the current quarter, over the past week and month. Of the 13 analysts, there were again no upward estimate revisions, for fiscal 2012, over the past 7 and 30 days. There was only 1 instance of a downward revision, for fiscal 2012, over the past week (and 2 cases in the last month). The current Zacks Consensus Estimate for fiscal year 2012 is $3.96, reflecting an estimated 15.09% year-over-year growth.  

Magnitude

Given the relative shortage of estimate revisions, the magnitude of revision for the first quarter has been static over the last week and month. Estimates for fiscal 2012 have remained stagnant over the past week and dipped by a penny in the past month.

Varian has produced positive surprises in two of the previous four quarters while it met or trailed estimates in the remaining two quarters. We expect that a similar mixed trend might continue. The company produced an average earnings surprise of 2.90% over the prior four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

Our Take

Varian is a leading manufacturer of integrated radiotherapy systems for treating cancer and a premier supplier of X-ray tubes for diagnostic imaging applications. The company operates in a technology-driven environment where success depends on the use of new technology, product development and upgrades. In the radiation oncology market, Varian competes with Accuray (ARAY).

Varian is poised to increase its market share in radiation oncology. It is currently enjoying a healthy demand for its coveted TrueBeam technology, which is meaningfully contributing to its net order oncology growth.

Moreover, Varian enjoys a strong balance sheet marked by minimal debt and sizeable cash. The company uses a part of its healthy cash flows for share repurchases.

However, Varian competes with larger players in a technology-intensive industry. Further, uncertainties stemming from health care reform and a still weak hospital capital spending environment across many developed countries, especially in Europe, are significant challenges. We currently have a Neutral long-term rating on Varian supported by a short-term Zacks #3 rank (Hold).