Varian Medical Systems Inc. (VAR - Free Report) is a prospective name in the global MedTech space. The stock has returned 30.7%, comparing favorably with the industry’s gain of 11.2% in a year’s time. Also, the current return is higher than the S&P 500 Index’s rally of 10.9%.
With a market capitalization of approximately $10.7 billion, the stock has met earnings expectations in each of the past four trailing quarters. However, the company has been grappling with a few issues at the moment. Cutthroat competition and persistent softness in the markets for freestanding clinics are likely to hamper the company’s prospects. Thanks to this somewhat mixed trend, the stock has a Zacks Rank #3 (Hold).
Here we take a detailed look on the company’s performance and operations to analyze why investors should hold on to this stock.
What’s Favoring Varian Medical?
Varian Medical’s impressive performance in the Oncology business, improving margins and the launch of Halcyon radiotherapy treatment system are the key highlights at the moment.
Favorable revenue opportunity from various Oncology and Imaging Component products, growing adoption of Proton Therapy, strong overseas presence, particularly in emerging countries, as well as new partnership deals are positives.
The company has been a strong player in Latin America. Varian Medical announced the opening of a new facility in Jundiaí, Brazil, which extends its global manufacturing and training footprint in the region. Through the partnership with the Brazilian Ministry of Health, Varian Medical aims to bring greater access to advanced radiotherapy treatment in that country and to greater Latin America.
We believe that the Brazil-based facility will provide access to advanced radiotherapy treatment in Latin America. In this regard, a research report by Market Data Forecast shows that the radiotherapy market in Latin America was worth $654 million in 2016 and is estimated to witness a CAGR of 6.5% to reach $897.7 million by 2021.
Considering the bountiful prospects, Varian Medical is likely to grow manifolds, leveraging on its Oncology segment. Per an estimate by the International Agency for Research on Cancer of the World Health Organization, annual cancer rates around the world are projected to increase from 14.1 million in 2012 to 20 million by 2025.
We believe that higher demand for Varian Medical’s products from China, India and Brazil will continue to drive international revenues in the long run.
For 2018, the company expects revenues in the range of 4-7%. Adjusted earnings per share are expected in the band of $4.24-$ 4.36, while cash flow from operations are projected in the range of $475-$550 million.
What Are the Probable Headwinds?
Varian Medical competes with large electronic companies such as Siemens and Philips as well as with smaller and more specialized radiation therapy equipment manufacturers like Elekta and Accuray.
In the emerging proton therapy market, the company faces competition from Hitachi, Ion Beam Applications, Mevion Medical Systems and Sumitomo. Intense competition is anticipated to increase R&D expenditures in the nascent proton therapy market, which will keep margins under pressure. Moreover, pricing pressure in traditional radiotherapy is a major concern.
Further, lackluster performance by the particle therapy segment has been a concern. Revenues in this segment declined 4% on a year-over-year basis to $29 million in the first quarter of fiscal 2018.
Why Should You Still Hold?
Unhindered by the persistent issues, analysts are optimistic about Varian Medical.
The Zacks Consensus Estimate for 2018 is pegged at $4.31 per share, showing an increase of 1.2% in the last three months. For the current quarter, the Zacks Consensus Estimate is at $1.03, reflecting a rise of 5.1%.
Varian Medical Systems, Inc. Price and Consensus
The uptick can be attributed to Varian Medical’s products and solutions, which have been experiencing rapid adoption. This is evident from the company's impressive top-line performance in first-quarter 2017. Revenues totaled $678.5 million, which increased 12.8% year over year.
Varian Medical has a VGM Style Score of A. Here V stands for Value, G for Growth and M for Momentum. Notably, the VGM Score is a comprehensive tool that helps investors screen winning stocks from the broader sectors. Further, the score highlights the determining elements in a stock that can drive it higher. Our research shows that stocks with a VGM Score of A or B, offer the best upside potential.
Varian Medical Systems, Inc. Revenue (TTM)
Currently, investors might want to hold on to the stock, courtesy of its prospects of outperforming peers in the near future.
Despite the temporary sluggishness, the company has been successful on the R&D front, which is evident from year-over-year expansion in its top line. We believe that Varian Medical’s innovative product pipeline will continue to drive overall growth over the long term.
A few better-ranked players in the broader medical sector are Bio-Rad Laboratories (BIO - Free Report) , Abaxis,Inc. and Edwards Lifesciences Corporation (EW - Free Report) .
Bio-Rad Laboratories sports a Zacks Rank of #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. The company has a long-term expected earnings growth rate of 20%.
Abaxis,Inc. , a Zacks Rank #2 (Buy) stock, has a long-term earnings growth rate of 5.1%.
Edwards Lifesciences has a long-term expected earnings growth rate of 15.1%. The stock has a Zacks Rank of #2.
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