Limited Accuray Expansion Expected

Accuray Incorporated (ARAY - Analyst Report) reported Q3 EPS that were lower than our estimate by $0.05 on revenue that exceeded our forecast. Q3 represented the fifth consecutive quarter of record revenue. We increased our FY08 revenue estimate but lowered our FY08 EPS estimate. We lowered our FY09 revenue & EPS estimates. Management reiterated its previously reduced FY08 revenue guidance. Our price target is based on roughly 2.6x calendar 2008 revenue estimate.

At its current price of $9.13 per share, ARAY is trading at roughly 2.3x calendar 2008 revenue estimate, which is at a discount to the group average multiple of roughly 2.6x. As a result of the weak economic conditions and tightening of the credit markets in the U.S., management previously reduced its FY08 revenue guidance and backlog and reduced backlog again at the end of the third quarter. This reduction still represents strong revenue growth of 50%-64% over fiscal 2007.

These customers may be delayed in obtaining, or may not be able to obtain, necessary financing for their purchases of the CyberKnife System or for the construction or renovation of facilities to house CyberKnife Systems. These delays have in some instances led to customers postponing the shipment and installation of previously ordered systems and may cause other customers to postpone their system installation or to cancel their agreement with ARAY.

Due to this uncertainty to growth, we expect limited multiple expansion. At roughly 2.6x the calendar 2008 revenue estimate, our price target is $10 and we rate the shares Hold.

Read the full analyst report on ARAY.

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