Varian Medical
Solomon's Select, by Mark Robertson, Managing Partner June 1st, 2007
VAR is a premier supplier of tubes and digital detectors for X-ray imaging in medical, scientific and industrial applications.
This image is used for intensity-modulated radiation therapy (IMRT) showing a cross section of the head in the nasal cavity area. This image was co-registered using Eclipse™ treatment planning software. The white cross hairs come together at the tumor site. The lines around the tumor are part of an IMRT treatment plan, and show that the highest radiation dose is being in concentrated right in the tumor, with the dose falling off rapidly as you move away from the tumor. This plan was designed for maximum preservation of the brain stem, which in this case is avoided altogether.
Varian Medical Systems (VAR) is the world’s leading manufacturer of medical devices and software for treating cancer and other medical conditions with radiotherapy, radiosurgery, proton therapy, and brachytherapy. VAR supplies informatics software for managing comprehensive cancer clinics, radiotherapy centers and medical oncology practices. The company is a premier supplier of tubes and digital detectors for X-ray imaging in medical, scientific and industrial applications and also supplies X-ray imaging products for cargo screening and industrial inspection.
Cancer is a dreaded disease and strikes close to home for many of us. When it does, we wish we had a real Superman with X-ray vision to help conquer the affliction. VAR fills in for the man of steel pretty well and is the 800-lb gorilla in the oncology arena. CEO Timothy Guertin is only 57 and has been with Varian for 30 years.
Growth
Sales growth at VAR has been 15.4% for the past ten years. Morningstar “estimates sales growth at 12.5% per year through 2011.”
Profitability
The trailing 5-year average for net margin is 13.1% and the trend is increasing. Value Line has projected 13.4% for 2007 and 14.8% for the long-term forecast.
Varian Medical (VAR) — Chronicle. The stock price has been relatively volatile, reaching $60 during early 2006 before retreating to recent levels around $40. Margins had been steadily improving until a slight decline in 2006. The recent price drop has propelled the projected annual return to 18-19% — the highest levels displayed on this chronicle.
Valuation
The industry average projected P/E for Medical Supplies is 24×. VAR has a projected average P/E ratio of 30×. (Value Line) The “fair value” P/E, according to Morningstar, is still approximately 27×. The imputed P/E (based on EPS growth forecasts, industry P/Es and the quality rating for Varian) is 22.5x according to the Solomon database.
Expected Returns, Quality & Conclusions
Based on a price at the time of the study of $39.71, the projected annual return was approximately 18.4%. The quality rating is 66.8. The financial strength index is 84%. VAR has very little long-term debt. The EPS stability is 90.
The road ahead for Varian is uncertain and 1Q results for 2007 and the outlook for the rest of the year were lower than expectations. With competitors like Siemens and Philips, focus is always at a premium. That said, focus is what Varian has done well and is one of the foundations of their business. When it comes to treating cancer, targeting delivers great rewards and improves lives. The long-term image for Varian is healthy.
Mark Robertson
Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.