Oncology and X-Ray products company, Varian Medical Systems (VAR), reported respectable first-quarter fiscal 2011 (ended September 30) earnings per share from continuing operations of 80 cents beating the Zacks Consensus Estimates of 73 cents, and exceeding the corresponding year-ago figure of 63 cents. Profit increased 22% year over year to $96.5 million, benefiting from rising sales of both oncology systems and X-Ray products.
First Quarter Highlights
Varian’s top line witnessed a 7% increase to $579.9 million in the first quarter, missing the Zacks Consensus Estimate of $584 million. Its net orders increased smartly 20% year over year to $592.8 million with order backlog up 10% to $2.2 billion.
Oncology Systems’ revenues grew 5% year over year to $452 million. Cumulative orders for the TrueBeam systems increased to more than 170 units. Varian’s X-Ray Products business had a strong quarter with revenues jumping 22% year over year to $112 million. Sales in the “Other” category, however, dropped 19% year over year to $16 million.
We have discussed the quarterly results at length here: Varian Posts a Mixed Bag, Ups View
Agreement – Estimate Revisions
The overall trend in estimate revisions for fiscal 2011 is completely static, since the release of the first quarter results, with none of the analysts (out of 12) changing their estimates over the past 7 days. Among the 12 analysts, only one changed his/her estimate (in the upward direction) for fiscal 2012 in the preceding week.
Magnitude – Consensus Estimate Trend
A lack of movement in estimates has led to magnitude leveling out for the current fiscal year. There was an increase of a penny in the forecast for 2012. The current Zacks Consensus Estimates for 2011 and 2012 are $3.45 and $3.88, respectively, reflecting an estimated 16.67% and 12.21% year-over-year growth.
Varian Stays at Neutral
Based on the healthy first quarter results, the company lifted its earnings per share target, for fiscal 2011, to a higher band of $3.39 to $3.45 from its earlier forecast of $3.34 to $3.39. However, Varian continues to project revenue growth between 10% and 11% for the year.
For the second quarter, Varian expects total revenues to grow about 9% to 10% year over year. The company forecasts earnings per share in a range 83 cents of 86 cents for the 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) and TomoTherapy (TOMO).
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.
The X-Ray Products segment has been a good performer enjoying high growth rates. It has been at the forefront in finding niches in industrial and security-related areas. On January 27, 2011, Varian announced a sizeable $450 million contract, over a 3-year timeframe, to supply medical imaging subcomponents to Toshiba Medical Systems.
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, especially in Europe, provide headwinds.
We currently have a Neutral recommendation on Varian over the long term. The stock currently has a Zacks #2 Rank, which translates into a short-term Buy 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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