Varian Medical Remains Neutral

We reiterate our Neutral rating on Varian Medical Systems ( VAR - Analyst Report ) . Its second-quarter fiscal 2012 earnings per share of 96 cents matched the Zacks Consensus Estimate. Revenues for the second quarter moved up roughly 11% year over year to $720 million and beat the Zacks Consensus Estimate of $700 million.

Varian is a leading manufacturer of radiotherapy systems for treating cancer and a supplier of X-ray tubes to Original Equipment Manufacturers (“OEMs”) for diagnostic imaging. It also has an “Other” segment, which comprises the Varian Particle Therapy business, the Security and Inspection Products business and the Ginzton Technology Center.

The company is well positioned to expand sales and order bookings through regular product upgrade cycles and further penetration in under-equipped international markets.

In Oncology Systems, Varian introduced the TrueBeam system for image guided radiotherapy, which is expected to expedite replacement of the company’s older systems. TrueBeam currently constitutes over 45% of Varian’s high energy accelerator orders. Since its inception in April 2009, Varian has booked about 490 orders for TrueBeam, of which 230 installations have been completed or represent work in progress.

Varian’s X-Ray Products business had a moderate quarter with revenues increasing 4% year over year. Revenue from the Other category increased $9 million to $32 million, driven primarily by revenues from the installation of the Scripps Proton system.

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 healthy demand for its TrueBeam technology, which is meaningfully contributing to its net order oncology growth.

Moreover, Varian enjoys a strong balance sheet marked by low 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 are currently Neutral on the stock. The stock currently retains a Zacks #4 Rank, which translates into a short-term Sell recommendation.