We reiterate our Neutral recommendation on Varian Medical (VAR: 53.41 +0.05 +0.09%), the world’s leading manufacturer of integrated radiotherapy systems for treating cancer and a premier supplier of X-ray tubes for diagnostic imaging applications. Second quarter 2010 earnings per share of 73 cents beat the Zacks Consensus Estimate of 68 cents, translating into a 7.35% positive surprise.Revenues grew 6% year over year, supported by favorable foreign exchange swings. Oncology Systems and X-Ray Products revenues increased 4% and 19%, respectively. Healthy growth in X-Ray product sales was fuelled by a higher demand from several new customers for the company’s flat panel detectors.
Varian is well positioned to expand its top line and order bookings in each of its major business segments through regular product upgrades and further penetration into international markets, which account for roughly 50% of the company’s revenues. International markets are under-equipped to address the growing incidence of cancer. The company’s strong overseas presence is expected to enable it to leverage this opportunity.
Varian is poised to increase its market share in the radiation oncology market. The company operates in a technology-driven environment, where success depends on the use of new technology, new product development and product upgrades. Varian is currently enjoying a healthy demand for its RapidArc radiation therapy, which is meaningfully contributing to its oncology net order growth.
However, Varian competes with larger players such as Siemens (SI: 92.64 -1.79 -1.90%) and Philips (PHG: 31.64 -0.07 -0.22%) in a technology-intensive industry. Moreover, uncertainties stemming from health care reform and a weak hospital capital spending environment provide headwinds. The North American market continues to be affected by shrinking budgets for capital equipment purchases, in part, due to the lingering effects of the recession. This may affect Varian’s domestic business.
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