[ young today, rich tomorrow ]

The Doctor Is In: Checking up on Varian Medical Systems stock

By Chris Lahiji, Tina Dressel on February 1st, 2008 • Health Care, Investing, Investing
Originally appeared in: Spring 2008Take Two
Chris Lahiji

True, Varian Medical Systems (NYSE: VAR) isn't a company with a lot of name recognition for most of us. However, the company's biggest enemy kills millions of Americans every year and is a major health concern for all of us: cancer. This company primarily develops cancer treatment products, but will it have a positive impact on your portfolio?

Likes
  1. The company's revenues topped $1 billion for the last 5 years in a row and are looking to have another record year in 2008.
  2. Varian's return on equity (ROE) sits at nearly 30 percent – the seventh greatest ROE in the industry, based on Yahoo's Industry Browser.
  3. The top five institutional holders of Varian stock own more than 25 percent of the company, and include giants such as Barclays and Vanguard. It says a lot that these big investors are putting their money on Varian.
  4. Older people have a greater risk of developing cancer, and the U.S. Census Report expects a 41 percent increase in those 65 and older between 2000 and 2015 – that's a lot of at-risk people that may need treatment.
  5. Varian's security division is a safety net by diversification, should anything come along to make their cancer treatment technology irrelevant.
Dislikes
  1. Fierce competition includes branches of technology giants General Electric and Philips – two billion-dollar companies whose medical branches alone out-hit Varian in sales and revenue.
  2. Despite strong EPS (earnings-per-share) growth rates in the past, the company's third and fourth quarters of 2007 showed depressingly negative year-over-year EPS growth rates. They seem to have sprung a leak somewhere.
  3. In this industry, innovation is a must to stay competitive, and companies are often obliged to spend big bucks to protect their intellectual property.
  4. About half of the company's revenue comes from the international market, which is tough to predict. Economic, political, and other risks could affect sales.
  5. The company's foundation is cancer treatment and therapies; any disruptive technology, or even a cure, could seriously undercut their position.
Tina Dressel

Varian Medical Systems fights battles on two fronts. The battle against its competitors is very much determined by whether the company can stay on the leading edge in the fight against cancer. Will Varian be able to keep up?

Likes
  1. The World Health Organization projects annual cancer rates to increase 50 percent by 2020. If Varian stays innovative, their equipment could be purchased to battle this disease.
  2. Varian has held relatively little debt, enabling the company to get a $100 million credit pact in 2007 for working capital and to help finance new acquisitions.
  3. Over the past five years, Varian experienced strong EPS and sales growth, 22 and 15 percent respectively.
  4. Varian's gross profit margin allows it to recoup over 41 cents per dollar of sales before paying for other operating expenses.
  5. Seven FDA approvals for Varian tools in 2007 show that the company is consistently improving on their technology – a must for any tech company.
Dislikes
  1. The medical technology industry is highly subject to healthcare spending and Medicare financing. Changes in regulations could have a huge impact on Varian's profit.
  2. Varian's ability to keep current customers and attract new ones is subject to the company staying at the forefront of innovation.
  3. The company's current liabilities are large relative to their assets, which could be a negative sign as to Varian's ability to fulfill its short-term obligations, such as bills or loan payments.
  4. Varian's year-to-date net income growth has been dismal – it actually reversed by almost 2 percent compared to last year. While the company can create sales, it may not be controlling its expenses.
  5. Oncology-related orders struggled in 2007, causing the company to be cautious with their 2007 earnings guidance. Despite an end-of-year earnings rally, oncology still falls behind Varian's other product lines.

 

Editor's Note: This is a quarterly publication, and as such, there could be significant information, news, or price changes that may differ from resources available at the time this article was written. All analysis is meant for educational purposes. You should not make decisions based on information contained in brass without the advice of a qualified professional advisor.

The Bottom Line

Chris' Bottom Line: I don't like the stock trading at these prices compared to their expected earnings, and I think the company will pull back once the market loses steam.

Tina's Bottom Line: Although Varian Medical Systems' business has been healthy for many years, it has yet to be seen whether Varian will stay out of the doctor's office.

Sources: varian.com; finance.yahoo.com; who.int; reuters.com; investopedia.com; fda.gov; biz.yahoo.com; moneycentral.msn.com

Post new comment

The content of this field is kept private and will not be shown publicly.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <em> <strong> <cite> <code> <ul> <ol> <li> <dl> <dt> <dd> <img> <p> <br> <blockquote>
  • Lines and paragraphs break automatically.

More information about formatting options

Image CAPTCHA
Enter the characters shown in the image.