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Varian Medical (VAR) Up 9.8% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Varian Medical Systems, Inc. . Shares have added about 9.8% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

Palo Alto, CA-based leading manufacturer of medical devices and software Varian Medical reported adjusted earnings of $0.89 per share in the second quarter of fiscal 2017, which beat the Zacks Consensus Estimate by $0.01 However, adjusted earnings declined 18.3% on a year-over-year basis.

Meanwhile, revenues of $655 million were up 6% from the year-ago quarter (up 7% at constant currency). Revenues were also ahead of the Zacks Consensus Estimate of $643 million.

Coming to backlog, Varian Medical reported a backlog of $3.1 billion at the end of the fiscal second quarter, up 4% on a year-over-year basis.

Segment Details

Oncology Systems:At this segment, revenues totaled $624 million, up 7% year over year. Per management, the oncology segment witnessed growth in every region, and solid potential in the emerging markets. The oncology software and service business also put up an impressive show.

Gross orders in the quarter totaled $648 million, up 6% at cc from the year-ago quarter. In the U.S., gross orders increased 3% at cc. In EMEA and APAC, gross orders jumped 10% and 7%, respectively, on a year-over-year basis.

Particle Therapy: Second-quarter revenues at the segment were $31 million, up 1% on a year-over-year basis. During the quarter, the company registered orders worth $28 million, including an order for a new single-room ProBeam Compact system in Delray, FL.

Notably, Varian Medical’s imaging components business segment is now operating separately as Varex Imaging and is accounted as a discontinued operation.

Margins

In the second quarter, Varian Medical posted a gross margin of 42%, flat year over year.

Expenses on research and development (R&D) in the quarter were $53.3 million or 8.1% of revenues, up 170 basis points (bps) year over year.

Meanwhile, selling, general and administrative (SG&A) expenses, this accounted for 20.1% of revenues in the second quarter, compared to 17.2% in the year-ago quarter. This marked a 290-bps expansion in margins.

Guidance

For the full fiscal, Varian Medical expects revenues from continuing operations to grow in the range of 2% to 4%. Adjusted earnings per share from continuing operations are projected in the band of $3.56 to $3.64.

For the third quarter, Varian Medical revenues are expected to increase 3% on a year-over-year basis. Adjusted earnings per diluted share are forecasted in the band of 92 cents to 96 cents.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimate flatlined during the past month. There has been one upward revision for the current quarter compared to one downward.

VGM Scores

At this time, Varian Medical's stock has a poor Growth Score of 'F', however its Momentum is doing a bit better with a 'D'. Charting a somewhat similar path, the stock was allocated a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for value based on our styles scores.

Outlook

The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.

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