Varian (VAR)
from Porter Stansberry’s Investment Advisory
In the radiotherapy market, Varian (VAR) is the 800-pound gorilla, with twice the revenue and market cap of its nearest competitors. And Varian’s valuations are lower—in relative terms—than its peers. All of Varian’s operational metrics top its peers, and the company returns more than 17% of every dollar it makes right back to shareholders. This medical device company just beat earnings estimates by a nickel, and industry growth should propel the shares even higher.
Varian can afford to outspend both its competitors combined in developing the latest advancements. Because of its scale, Varian is able to spend this much money without breaking the bank. Its research and development (R&D) budget represents less than 7% of its revenue. And Varian’s cash balance significantly exceeds its debt, while its competition is heavily indebted.
Varian operates two business segments: Oncology Systems and Imaging Components. Oncology is the company’s lifeblood, accounting for 77% of its revenue and 80% of its profits. Within the Oncology segment, Varian sells state-of-the-art radiotherapy machines (like its smart-beam tools), as well as updated versions of traditional radiation technology.
In 2014, Varian made nearly 60% of its sales outside the United States. But there’s plenty more room to grow, as many health systems around the world are ill-equipped to handle the ever-growing number of cancer patients. The International Journal of Radiation Oncology, Biology, and Physics estimates that radiotherapy is required in a majority of new cancer patients, and at least 9,000 treatment machines will be required by 2020 just in the low- to middle-income countries.
Nine thousand units is an incredible growth opportunity. Obviously, that 9,000-unit need will probably not be met in full. And Varian doesn’t have 100% market share. But it highlights the recognized need for Varian’s technology around the world. And with the largest profile, biggest R&D budget, and most robust sales channel in the world, Varian is positioned better than anyone to capitalize on this trend.
The past two quarters have ended with record backlog, which currently stands at more than $3.5 billion – or about 115% of 2014’s annual revenue. When you’ve got more than a year’s worth of revenue piled up as backlog. And that backlog is growing at 10%-15% per quarter; clearly that’s a sign of pent-up demand.
Varian crushed its first-quarter earnings for many of the reasons outlined in this issue. Revenue rose 4%. Margins increased to 44.3%. Backlog jumped another 13%. The company cited a promising lung study combining its latest technology with a chemo drug called erlotinib.
Wall Street loved the news. The stock went up $10 and immediately shifted from “pretty cheap” to just “fairly priced.” Today, the stock trades right at the edge of our buy range of $93.
Please be patient opening a position... and do not chase this stock past our buy-up-to limit. There’s a good chance that some of the earnings enthusiasm might wane in the short term and give you a better opening price. But regardless, this is a short-term concern on a stock we want to own for the long run. And use a 25% trailing stop on your position.
Porter Stansberry, Porter Stansberry’s Investment Advisory, www.stansberryresearch.com, 888-261-2693, February 2015