Medical Stocks

Varian Medical Systems Inc Valuation – March 2018 $VAR

Company Profile (excerpt from Reuters): Varian Medical Systems, Inc., incorporated on January 22, 1976, is a manufacturer of medical devices and software for treating cancer and other medical conditions with radiotherapy, radiosurgery, proton therapy and brachytherapy medical devices and software for treating cancer and other medical conditions with radiotherapy, radiosurgery, proton therapy and brachytherapy. The Company also has Varian Particle Therapy (VPT) and the operations of the Ginzton Technology Center (GTC). Its VPT business develops, designs, manufactures, sells and services products and systems for delivering proton therapy, another form of external beam radiotherapy using proton beams for the treatment of cancer. Its ProBeam system is capable of delivering intensity modulated proton therapy (IMPT) using pencil beam scanning technology. Its ProBeam Compact is a single room proton therapy product.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of VAR – March 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $11,328,280,884 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.45 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 26.30% Fail
6. Moderate PEmg Ratio PEmg < 20 32.80 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 8.18 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.45 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $3.78
MG Growth Estimate 0.18%
MG Value $33.46
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $54.76
MG Value based on 0% Growth $32.10
Market Implied Growth Rate 12.15%
Current Price $123.87
% of Intrinsic Value 370.23%

Varian Medical Systems, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the low current ratio, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $3.73 in 2014 to an estimated $3.78 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 12.15% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Varian Medical Systems, Inc. revealed the company was trading above its Graham Number of $39.58. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 32.8, which was below the industry average of 43.8, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $4.79.

Varian Medical Systems, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $4.79
Graham Number $39.58
PEmg 32.80
Current Ratio 1.45
PB Ratio 8.18
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Total Current Assets $2,351,600,000
Total Current Liabilities $1,616,400,000
Long-Term Debt $0
Total Assets $3,299,800,000
Intangible Assets $289,000,000
Total Liabilities $1,913,200,000
Shares Outstanding (Diluted Average) 91,600,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $4.27
Sep2017 $2.68
Sep2016 $4.19
Sep2015 $4.09
Sep2014 $3.83
Sep2013 $3.98
Sep2012 $3.76
Sep2011 $3.36
Sep2010 $2.91
Sep2009 $2.55
Sep2008 $2.19
Sep2007 $1.83
Sep2006 $1.81
Sep2005 $1.50
Sep2004 $1.18
Sep2003 $0.92
Sep2002 $0.67
Sep2001 $0.40
Sep2000 $0.41
Sep1999 -$0.20
Sep1998 $0.61

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $3.78
Sep2017 $3.60
Sep2016 $4.03
Sep2015 $3.91
Sep2014 $3.73
Sep2013 $3.56
Sep2012 $3.22
Sep2011 $2.82
Sep2010 $2.45
Sep2009 $2.14
Sep2008 $1.86
Sep2007 $1.61
Sep2006 $1.41
Sep2005 $1.11
Sep2004 $0.85
Sep2003 $0.60
Sep2002 $0.42

Recommended Reading:

Other ModernGraham posts about the company

Varian Medical Systems Inc Valuation – July 2016 $VAR
Varian Medical Systems Inc. Valuation – November 2015 Update $VAR
The Best Companies of the Medical Industry – September 2015
The 20 Best Stocks For Value Investors This Week – 8/15/15
Varian Medical Systems Inc Analysis – August 2015 Update $VAR

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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