On Sep 16, we maintained our Neutral recommendation on Varian Medical Systems Inc. (VAR). We are encouraged by the opportunities for the company to increase its market share in the radiation oncology market as well as its strong balance sheet. However, we are disappointed with its lower revenues and earnings guidance for fiscal 2013 and strong competition from well-funded companies.
Why Reiterated?
On Jul 25, Varian’s third-quarter fiscal 2013 earnings per share of $1.03 topped the Zacks Consensus Estimate of $1.01 and the year-ago level of 96 cents. However, sales of $726.2 million lagged the Zacks Consensus Estimate of $753 million, despite a 3% rise.
VAR lowered its outlook for fiscal 2013. The company envisages revenues to grow by about 5% for fiscal 2013 compared with the prior outlook of 8%. Earnings per share guidance have been lowered to the band of $4.00–$4.04 per share compared with the earlier guidance of $4.09–$4.14.
Following the release of fiscal third quarter results, the Zacks Consensus Estimate for fiscal 2013 earnings went up by a penny to $4.03 per share. The Zacks Consensus Estimate for fiscal 2014 earnings also went up by a penny to $4.46 per share. With the Zacks Consensus Estimates for both the fiscal years remaining almost flat, the company now has a Zacks #3 Rank (Hold).
Varian is poised to increase its market share in the radiation oncology market as international markets are under-equipped to address the growing incidence of cancer. The company also enjoys a strong balance sheet marked by low long-term debt and sizeable surplus cash.
However, VAR faces strong competition from large electronic companies such as Siemens and Philips as well as from smaller and more specialized radiation therapy equipment manufacturers like Elekta and Accuray Inc. (ARAY). Further, economic problems in Europe and resultant fiscal tightening may affect Varian’s international business.
Other Stocks to Look For
Other stocks that are currently performing well in the medical instruments industry include MELA Sciences, Inc. (MELA) and Pacific Biosciences of California, Inc. (PACB). Both of them carries a Zacks Rank #2 (Buy).
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