We remain Neutral on Varian Medical Systems (VAR). Its first-quarter fiscal 2012 earnings per share of 79 cents beat the Zacks Consensus Estimate of 76 cents but missed the year-ago earnings of 80 cents per share. Net earnings for the quarter slipped 6.5% year over year to $90.2 million (or 79 cents a share).
Varian’s top line witnessed a 8% increase to $625 million in the quarter, but trailed the Zacks Consensus Estimate of $633 million. Varian experienced delays in orders in the North American oncology segment while sales of X-Ray products were hit by inventory adjustments by Japanese customers. Order backlog increased 14% year over year to $2.5 billion at the end of the quarter.
Revenues from the Oncology Systems segment rose 8% year over year to $488 million, backed by healthy demand for the company’s TrueBeam radiotherapy and radiosurgery system. Net orders went up 6% to $485 million as an 11% decline in North America was more than offset by 22% growth in international markets.
Varian’s X-Ray Products business ended the first quarter with sales of $113 million, up just 1% year over year. Net orders slipped 2% to $110 million.
Revenues from the “Other” category shot up about 56.3% year over year to $25 million in the quarter. Sales were driven by revenues from the setting up of the Scripps proton system.
Moving ahead, Varian expects revenues to grow 10% for fiscal 2012. Net earnings per share for the fiscal have been projected to rise by roughly 15%.
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).
Varian is poised to increase its market share in radiation oncology. It is currently enjoying a healthy demand for its coveted TrueBeam technology, which is meaningfully contributing to its net order oncology growth.
Moreover, Varian enjoys a strong balance sheet marked by minimal debt and sizeable cash. The company uses a part of its healthy cash flows for share repurchases.
However, Varian competes with larger players in a technology-intensive industry. Further, uncertainties stemming from health care reform and a still weak hospital capital spending environment across many developed countries, especially in Europe, are significant challenges. We currently have a long-term Neutral rating on Varian supported by a short-term Zacks #3 Rank (Hold).
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