Earnings Preview: Varian Medical

Varian Medical Systems (VAR) is slated to report first quarter fiscal 2011 (ending December 31) results on January 26. The company expects earnings per share in the range of 71 cents to 74 cents for the quarter. The current Zacks Consensus Estimate for the first quarter is 73 cents, representing an estimated year-over-year increase of 15.71%.

Fourth Quarter Recap

Varian posted fourth-quarter 2010 adjusted (excluding one-time items) earnings per share from continuing operations of 87 cents, beating the Zacks Consensus Estimate of 84 cents. Total revenue was $652 million, up 1.6% year over year in constant currency, lower than the Zacks Consensus Estimate of $667 million.

Varian’s net orders came in at $777 million, up 12% in constant currency. The backlog at the end of the quarter stood at $2.2 billion, up 10% year over year.

Revenues from Varian’s Oncology Systems segment, consisting of radiotherapy, brachytherapy, and radiosurgery products, amounted to $512 million, down 3% year over year. Revenues from the company’s X-Ray Products segment, consisting of X-ray tubes and digital detectors for imaging without films, stood at $107 million, up 16% year over year. The segment benefited from rapidly growing demand for medical, industrial and security-oriented X-Ray products.

Estimate Revision Trend

Agreement

Among the 10 analysts covering the stock, there were no estimate revisions for the current quarter and fiscal year over the past week or month. The current Zacks Consensus Estimate for 2011 is $3.38, reflecting an estimated 14.22% year-over-year growth.

Magnitude

Given the lack of estimate revisions, the magnitude of revision for the first quarter has been static over the last week and month. Varian has generated positive earnings surprise of 9.32% over the prior four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

Our Take on Varian

Varian is the world’s 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, new product development and product upgrades. In the radiation oncology market, Varian competes head-to-head with Accuray Incorporated (ARAY) and TomoTherapy (TOMO).

Varian is poised to increase its market share in the radiation oncology market. It is currently enjoying a healthy demand for its coveted RapidArc 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 faster rate than the domestic market.

Service constitutes about one-third of Oncology segment revenues, which is recurring in nature. It is expected to further grow as the company expands its installed base in overseas markets, particularly 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 still weak hospital capital spending environment across many developed countries provide headwinds. We currently have a Neutral recommendation on Varian over the long term. The stock currently retains a Zacks #4 Rank, which translates into a short-term Sell recommendation.

VARIAN MEDICAL (VAR): Free Stock Analysis Report

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