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.
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 |
Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
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
Other ModernGraham posts about related companies
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.
Leave a Reply