Varian Medical Systems Inc. Quarterly Valuation – November 2014 $VAR

Varian_Medical_Systems_LogoBenjamin 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 the 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows – November 2014.  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 Oncology Systems business segment designs, manufactures, sells and services hardware and software products for treating cancer with conventional radiotherapy, including IMRT, IGRT and volumetric modulated arc therapy, stereotactic body radiotherapy, stereotactic radiotherapy, stereotactic radiosurgery and brachytherapy. In August 2014, the Company acquired certain assets of Transpire, Inc., including Acuros dose calculation software that has been integrated into Varian’s BrachyVision and Eclipse treatment planning software products.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. 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
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. 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

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - FAIL
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $85.16
MG Value $90.12
MG Opinion Fairly Valued
Value Based on 3% Growth $54.11
Value Based on 0% Growth $31.72
Market Implied Growth Rate 7.16%
Net Current Asset Value (NCAV) $7.28
PEmg 22.82
Current Ratio 2.07
PB Ratio 5.45

Balance Sheet – September 2014

Current Assets $2,494,000,000
Current Liabilities $1,202,000,000
Total Debt $388,000,000
Total Assets $3,357,000,000
Intangible Assets $241,000,000
Total Liabilities $1,741,000,000
Outstanding Shares 103,500,000

Earnings Per Share

2014 $3.83
2013 $3.98
2012 $3.76
2011 $3.36
2010 $2.91
2009 $2.55
2008 $2.19
2007 $1.83
2006 $1.81
2005 $1.50
2004 $1.18

Earnings Per Share – ModernGraham

2014 $3.73
2013 $3.56
2012 $3.22
2011 $2.82
2010 $2.45
2009 $2.14

Dividend History
Varian Medical Systems does not pay a dividend.


Varian Medical Systems Inc. is suitable for the Enterprising Investor but not the Defensive Investor, who is concerned by the lack of dividends and the high PEmg and PB ratios.  The Enterprising Investor’s only initial concern is the lack of dividends.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.45 in 2010 to $3.73 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 7.16% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

Be sure to check out previous ModernGraham valuations of Varian Medical Systems Inc. (VAR) for greater perspective!

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.

Disclaimer:  The author did not hold a position in Varian Medical Systems Inc. (VAR) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.






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