Reiterate Varian at Neutral

On Jan 28, we retained Varian Medical Systems (VAR - Analyst Report), an oncology and X-Ray products company, at Neutral after the company beat Zacks Consensus Estimates for revenues and earnings for the fiscal first quarter. The results came despite a contraction in oncology net orders for Varian outside North America.

Why the Retention?

Varian Medical posted first-quarter fiscal 2013 adjusted net earnings of 89 cents per share, beating the Zacks Consensus Estimate of 86 cents per share and surpassing the year-ago earnings of 79 cents a share. Revenues in the fiscal first quarter increased 8% year over year to $678.4 million, beating the Zacks Consensus Estimate of $676 million. Sale of oncology products was strong in North America while X-Ray products worldwide sold at a brisk pace.

Following the release of the fiscal first quarter results on Jan 23, the Zacks Consensus Estimate for fiscal 2013 has moved down by just a penny to $4.12 while the same for 2014 has remained stagnant at $4.66.

Moving ahead, Varian continues to expect revenues to moderately grow by 8% to 9% for fiscal 2013. Net earnings for fiscal 2013 have been marginally revised in the band of $4.08 to $4.16 (earlier $4.06 and $4.16) per share. For second-quarter fiscal 2013, the company envisions sales to grow roughly 5% to 6% year over year. Varian expects net earnings in the range of 98 cents to $1.03 per share, including a restructuring charge for the second quarter.

Varian is a leading manufacturer of integrated radiotherapy systems for cancer treatment, 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).

The company is poised to increase its market share in radiation oncology. It currently enjoys a healthy demand for its coveted TrueBeam technology, which has meaningfully contributed to its net order oncology growth. Varian’s TrueBeam was designed to treat tumors with beams of high speed and precision. It incorporates several technological innovations such as patient positioning and managing his/her motion. Given its high intensity nature, TrueBeam can dispense strong dosage over twice as fast as that possible with earlier equipment.

Truebeam currently constitutes over 50% of Varian’s high energy accelerator orders. Since its inception in April 2009, Varian has booked more than 690 orders for TrueBeam, of which over 380 installations have been completed or represent work in progress. In January 2013, Varian revealed FDA 510(k) clearance for its Edge Radiosurgery Suite. Given the demographic trends across the globe, this integrated system might be a breakthrough in cancer treatment.

Moreover, Varian continues to post decent results despite the contagion of economic problems in Europe and sustained softness in certain end markets. It enjoys a strong balance sheet marked by low debt and sizeable cash. The company also periodically deploys capital to boost investor confidence via 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.

Other Stocks to Consider

The stock carries a Zacks Rank #3, which translates into a short-term Hold rating. Cantel Medical Corp. (CMN - Snapshot Report) and Cyberonics Inc. (CYBX - Analyst Report) are Zacks Rank #1 (Strong Buy) stocks which are expected to do well.