Oncology and X-Ray products company, Varian Medical Systems (VAR), reported second-quarter (ended March) fiscal 2011 earnings per share from continuing operations of 86 cents, just beating the Zacks Consensus Estimate of 85 cents and exceeding the year-ago figure of 73 cents. Profit increased 13.2% year over year to $103.1 million, benefiting from rising sales of both oncology systems and X-Ray products.
Second Quarter Highlights
Varian’s top line witnessed an 11% year-over-year increase to $648 million in the second quarter, beating the Zacks Consensus Estimate of $640 million. Order backlog rose 11% to $2.2 billion in the reported quarter. Growth was driven by increase in net orders for TrueBeam system, Oncology services, X-Ray tubes and panels as well as security systems.
Oncology Systems’ revenues grew 9% year over year to $508 million. Varian’s X-Ray Products business had a strong quarter with revenues jumping 15% to $118 million. Sales in the “Other” category rose 20% to $23 million.
We have discussed the quarterly results at length here: Varian Beats, Maintains View
Agreement – Estimate Revisions
The overall trend in estimate revisions for fiscal 2011 is mixed since the release of the second quarter results. Four analysts out of ten raised their estimates in the last 30 days while three lowered the same. The trend for fiscal 2012 was more bullish with 7 analysts out of 11 making upward revisions accompanied by only 2 downward revisions in the past 30 days. Estimates for both fiscal years manifest lack of activity over the past week.
Magnitude – Consensus Estimate Trend
The mixed movement of estimates has led to magnitude leveling out, for the current fiscal year, over the past 30 days. There was an increase of 7 pennies, in the forecast for 2012, over the last month. However, the magnitude remained torpid over the last 7 days in both cases. The current Zacks Consensus Estimates for 2011 and 2012 are $3.47 and $3.97, respectively, reflecting an estimated 17.20% and 14.55% year-over-year growth.
Varian Stays at Neutral
Based on the healthy second quarter results, the company maintained its earnings per share target, for fiscal 2011, in a band of $3.39 to $3.45. Further, Varian continues to project revenue growth between 10% and 11% for the year.
For the third quarter, Varian expects total revenues to grow about 11% to 12% year over year. The company forecasts earnings per share in a range 83 cents of 86 cents for the current quarter.
Varian is a leading manufacturer of integrated radiotherapy systems for treating cancer 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), in certain segments.
Varian is poised to increase its market share in radiation oncology. It is currently enjoying a healthy demand for its coveted RapidArc and TrueBeam radiotherapy technology, which is meaningfully contributing to its oncology net order growth.
International markets are under-equipped to address the growing incidence of cancer. In line with growing demand for cancer treatment in overseas markets, Varian’s ex-U.S. sales, in Europe and particularly Asia, are growing at a noticeable pace. The company is paying special attention to serving more hospitals in China and India.
However, Varian aggressively competes with well-funded competitors for a limited pool of sales volume. Further, uncertainties stemming from health care reform and a stringent hospital capital spending environment across many developed countries, especially in Europe, provide headwinds.
We currently have a Neutral recommendation on Varian over the long term. The stock currently has a Zacks #3 Rank, which translates into a short-term Hold recommendation.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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