Varian Medical (VAR) Beats On Q4 Earnings And Revenues

Varian Medical Systems Inc. (NYSE:VAR) reported earnings of $1.38 per share in the fourth quarter of fiscal 2016, which beat the Zacks Consensus Estimate of $1.35 and improved from $1.04 in the year-ago quarter. The year-over-year growth was primarily driven by strong margin expansion in the quarter.

Revenues of $912.5 million increased 11.6% year over year and beat the Zacks Consensus Estimate of $882 million.

Varian reported a backlog of $3.5 billion at the end of the fiscal fourth quarter, down 1% on a year-over-year basis. This was due to declines in the Particle Therapy and Imaging Components backlogs.

Segment Details

Oncology Systems' revenues totaled $678 million, up 7% year over year. Fiscal fourth-quarter gross orders were $897 million, down 2% from the year-ago quarter.

Imaging Components revenues were $166 million, up 7% from the year-ago period. Gross orders totaled $168 million for the reported quarter, up 2% from the year-ago period. Varian’s plan to separate the Imaging Components business into a new, independent, publicly traded company via a tax-free distribution remains on track. The new company will be known as Varex Imaging Corporation and the whole process is expected to be completed by the end of calendar year 2016.

Other segment (which includes Varian Particle Therapy business and the Ginzton Technology Center), recorded revenues of $68 million, up $38 million from the prior-year period. During the quarter under review, the Particle Therapy business booked its first order for its Compact single room system.

Financial Condition

As of Sep 30, 2016, Varian Medical had $844 million in cash and cash equivalents and $667 million in debt. Cash flow from operations in the fiscal fourth quarter was $152 million. During the reported quarter, the company spent $87 million on repurchasing approximately 1 million shares of the common stock.

Outlook

For the first quarter of fiscal year 2017, Varian expects adjusted earnings in the range of $1.03–$1.07 per share. Revenues are expected to increase about 1% to 2% in fiscal 2017.

Our Take

Varian’s oncology business growth prospects remain impressive. The company is addressing both tier 1 and mid-tier markets through its Edge, Truebeam and VitalBeam products. The company is also winning contracts, not only in the Americas but also in international markets, which is a huge positive.

We believe China and Africa present significant top-line growth opportunities in the near term. The company is opening new offices in Africa and the Middle East, which shows that it is aware of the growth opportunities in the region.

Moreover, Varian’s strong product pipeline is a key growth catalyst. The company believes that the Proton system has massive growth opportunities.

Nevertheless, increasing local competition is the primary headwind. Moreover, the Imaging Components’ business spin-off will remain an overhang on the stock, at least in the near term.

Zacks Rank & Key Picks

Currently, Varian carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader medical sector are Intuitive Surgical Inc. (NASDAQ:ISRG) , AngioDynamics Inc. (NASDAQ:ANGO) and Glaukos Corporation (NYSE:GKOS) . Notably, all the companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Intuitive Surgical has a long-term expected earnings growth rate of approximately 26.7%. The stock represents an impressive one-year return of 11.35%.

AngioDynamics has a long-term expected earnings growth rate of 15.00%. The company posted a solid one-year return of almost 30%.

Glaukos Corporation recorded a stellar one-year return of almost 69.9 %. Notably, the company posted positive surprises in the past four quarters, the average being 110.93%.

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