Varian (VAR) Up 2.2% Since Last Earnings Report: Can It Continue?
A month has gone by since the last earnings report for Varian Medical Systems (VAR). Shares have added about 2.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Varian due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Varian Meets Q1 Earnings Estimates, Foothold Strong in China
Varian’s first-quarter fiscal 2019 adjusted earnings of $1.06 per share were on par with the Zacks Consensus Estimate. Adjusted earnings were flat with the year-ago quarter figure.
Revenues totaled $741 million, which outpaced the consensus mark of $717.9 million. On a year-over-year basis, revenues rose 9.2% and 10% at constant currency (cc). Quarterly revenues were negatively impacted by $8 million.
Halcyon Drives Revenues
In the first quarter, the Halcyon platform received 20 new orders. Since its launch, Varian has received 202 orders worldwide.
The recent approval from China National Medical Product Administration has expanded the global availability of Halcyon.
Segment Details
Oncology Systems: In the first quarter, revenues at the segment totaled $702.5 million, up 8% year over year and 9% at cc. Excluding the impact of tariffs, revenues were up 9% year over year.
Varian’s worldwide net installed base had 8,918 units, up 322 units on a year-over-year basis. As a whole, gross orders grew 16% from the year-ago quarter, marking the highest growth in a decade.
Geographically, gross orders in Americas increased 12% on a year-over-year basis. In EMEA, gross orders rose 15% year over year, marking the sixth consecutive quarter of double-digit growth. In APAC, gross orders increased 25% year over year on strength in China.
Operating earnings at the segment declined 10% year over year owing to the impact of tariffs.
Proton Solutions: Revenues at the segment climbed 32% on a year-over-year basis to $38.5 million. Per management, this was driven by clinical handovers, representing an important recurring revenue source for the segment.
Margins
Total gross profit in the reported quarter was $316.1 million, up 4.4% year over year. Gross margin in the reported quarter was 42.7% of net revenues, down 190 basis points (bps) on a year-over-year basis.
Research and development expenses rose 8.9% year over year to $60.9 million. Selling, general and administrative expenses fell 4% year over year to $120.5 million.
Adjusted operating income in the fiscal first quarter totaled $120.2 million, down 4.6% year over year. As a percentage of revenues, adjusted operating margin was 16.2% down 240 bps.
Guidance Reiterated
Varian has kept its guidance for fiscal 2019 intact.
For fiscal 2019, year-over-year revenue growth is expected in the range of $3.06-$3.15 billion, up 5-8%.
Adjusted operating earnings, as a percentage of revenues, is projected in the band of 17-18%.
Adjusted net earnings per share are expected in the range of $4.60 to $4.75.
Cash flow from operations is expected in the band of $460-$510 million for the fiscal.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
At this time, Varian has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Varian has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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