Reaffirming Varian at Neutral

We remain Neutral on Varian Medical Systems (VAR - Analyst Report). Its first-quarter fiscal 2012 earnings per share of 79 cents beat the Zacks Consensus Estimate of 76 cents but missed the year-ago earnings of 80 cents per share. Net earnings for the quarter slipped 6.5% year over year to $90.2 million (or 79 cents a share).

Varian’s top line witnessed a 8% increase to $625 million in the quarter, but trailed the Zacks Consensus Estimate of $633 million. Varian experienced delays in orders in the North American oncology segment while sales of X-Ray products were hit by inventory adjustments by Japanese customers. Order backlog increased 14% year over year to $2.5 billion at the end of the quarter.

Revenues from the Oncology Systems segment rose 8% year over year to $488 million, backed by healthy demand for the company’s TrueBeam radiotherapy and radiosurgery system. Net orders went up 6% to $485 million as an 11% decline in North America was more than offset by 22% growth in international markets.

Varian’s X-Ray Products business ended the first quarter with sales of $113 million, up just 1% year over year. Net orders slipped 2% to $110 million.

Revenues from the “Other” category shot up about 56.3% year over year to $25 million in the quarter. Sales were driven by revenues from the setting up of the Scripps proton system.

Moving ahead, Varian expects revenues to grow 10% for fiscal 2012. Net earnings per share for the fiscal have been projected to rise by roughly 15%.

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 - Analyst Report).

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 long-term Neutral rating on Varian supported by a short-term Zacks #3 Rank (Hold).