Varian Medical Systems Inc. (VAR) Quarterly Valuation – May 2014
Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Undervalued Companies for the Defensive Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Varian Medical Systems Inc. (VAR) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Varian Medical Systems, Inc., is a manufacturer of medical devices and software for treating cancer and other medical conditions with radiotherapy, radiosurgery, proton therapy and brachytherapy. The Company is a supplier of X-ray imaging components for medical, scientific, and industrial applications and also supplies X-ray imaging products for cargo screening and industrial inspection. The Company’s mission is to explore and develop radiation technology that helps to protect and save lives and prevent harm. The Company offers tools for fighting cancer, taking X-ray images and protecting ports and borders. The Company’s Oncology Systems business segment designs, manufactures, sells and services hardware and software products for treating cancer with conventional radiotherapy. In April 2014, the Company acquired certain assets of Velocity Medical Solutions, LLC.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| Recent Price | $81.95 |
| MG Value | $95.33 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $56.15 |
| Value Based on 0% Growth | $32.92 |
| Market Implied Growth Rate | 6.33% |
| Net Current Asset Value (NCAV) | $8.47 |
| PEmg | 21.16 |
| Current Ratio | 2.17 |
| PB Ratio | 5.08 |
Balance Sheet – 3/28/2014
| Current Assets | $2,678,300,000 |
| Current Liabilities | $1,234,700,000 |
| Total Debt | $412,500,000 |
| Total Assets | $3,475,800,000 |
| Intangible Assets | $226,800,000 |
| Total Liabilities | $1,796,800,000 |
| Outstanding Shares | 104,020,000 |
Earnings Per Share
| 2014 (estimate) | $4.21 |
| 2013 | $3.98 |
| 2012 | $3.76 |
| 2011 | $3.44 |
| 2010 | $2.96 |
| 2009 | $2.65 |
| 2008 | $2.31 |
| 2007 | $1.83 |
| 2006 | $1.80 |
| 2005 | $1.50 |
| 2004 | $1.18 |
Earnings Per Share – ModernGraham
| 2014 (estimate) | $3.87 |
| 2013 | $3.59 |
| 2012 | $3.27 |
| 2011 | $2.90 |
| 2010 | $2.52 |
| 2009 | $2.21 |
Conclusion:
Varian Medical Systems Inc. is suitable for the Enterprising Investor but not the Defensive Investor.  Defensive Investors are concerned with the lack of dividend payments and the high PEmg and PB ratios.  Enterprising Investors also find the lack of dividend payments concerning.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company and comparing it to other opportunities such as General Electric (GE).  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.52 in 2010 to an estimated $3.87 for 2014.  This demonstrated level of growth supports the market’s implied 6.33% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Varian Medical Systems Inc. (VAR)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Varian Systems Inc. (VAR) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.
