Varian Medical Systems Inc. VAR recently amended its Credit Agreement with lenders headed by Bank of America that expands its 2013 Revolving Credit Facility from $300 million to $500 million. However, the amendment did not affect share price, as it declined a miniscule 0.3% to close at $80.70 on Nov 25, 2015.
Varian will now pay lower interest under the amended Credit Agreement. The company will also pay a reduced commitment fee on the unused portion of the 2013 Revolving Credit Facility at a rate of 0.125% to 0.20%. The original rate was 0.15% to 0.275% based on a leverage ratio.
The amended credit agreement improves Varian’s liquidity in the near term. At the end of fiscal 2015, the company had cash & cash equivalents of $845.5 million, while total debt was almost $446 million. Cash provided by operating activities was $469.6 million, up 4.6% from fiscal 2014.
The improved liquidity will help Varian to aggressively buyback shares. The company’s board of directors recently approved a program that authorizes it to repurchase an additional 8 million shares between Nov 21, 2015 and Dec 31, 2016. The company expended $422 million to repurchase 4.8 million shares in fiscal 2015. We believe the additional share buyback will boost the bottom line in fiscal 2016.
Varian provided positive fiscal 2016 guidance. The company forecasts adjusted earnings in the range of $4.45–$4.55 per share. Revenues are expected to increase 4%–5%.
For the first quarter of fiscal 2016, revenues are expected to remain flat on a year-over-year basis. Adjusted earnings are expected in the band of 88–92 cents per share.
We believe Varian is well positioned to benefit from higher demand for its products in China and the BRICA countries. A likely increase in the reimbursement rate (roughly 2%) for radiation oncology services based on the CMS 2016 proposal is a major positive for Varian. We also believe that the recently approved VitalBeam product presents significant growth opportunity for the company over the long haul.
However, intensifying competition in the oncology market is a major concern. The Imaging Component segment is expected to remain sluggish at least in the near term. Meanwhile, owing to a strong U.S. dollar, the company is facing considerable pricing pressure at the Imaging Component segment, which is a significant headwind over the next several quarters.
Zacks Rank & Key Picks
Currently, Varian has a Zacks Rank #3 (Hold).
Better-ranked stocks include Masimo MASI, Natus Medical BABY and Fluidigm FLDM. While Masimo and Natus Medical sport a Zacks Rank #1 (Strong Buy), Fluidigm carries a Zacks Rank #2 (Buy).
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