Varian (VAR) Now a Strong Sell on Challenging Q1 Outlook - Analyst Blog

On Dec 11, 2014, Zacks Investment Research downgraded Varian Medical Systems (VAR) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

The downgrade primarily reflects Varian's challenging near-term outlook. Both Oncology and Imaging segments of the company are facing significant headwinds. Moreover, sluggish European market trends will remain an overhang. To add to the woes, gross margin is expected to remain flat owing to unfavorable geographic mix and significant pricing pressure in the U.S.

For the first quarter of fiscal 2015, Varian expects combined revenues from Oncology Systems and Imaging Components businesses as well as proton orders, currently in backlog, to grow 0%–2%, which lags our expectations.

Meanwhile, intensifying competition from the likes of Siemens and Philips as well as smaller and more specialized radiation therapy equipment manufacturers such as Elekta and Accuray Inc. (ARAY) is a growing concern.

Varian continues to invest in developing new platforms and technologies in order to improve its customer base and competitive position. Although these investments will help improve its long-term growth prospects, it will continue to hurt its bottom line over the next several quarters. Also, higher operating expenses will remain a drag on profits in the near term.

Over the last 60 days, 4 out of 5 analysts covering Varian have lowered their first-quarter fiscal 2015 earnings estimates due to growing headwinds. The Zacks Consensus Estimate has declined 19 cents (18%) to 87 cents over the period, which is better than Varian's guided range of 76 cents to 80 cents (including restructuring expenses).

For fiscal 2015, the Zacks Consensus Estimate is pegged at $4.32, down 47 cents (9.8%) over the last 60 days, as all the 6 analysts lowered their fiscal year estimates. However, the Zacks Consensus Estimate compares favorably with Varian's guided range of $4.16 to $4.26 (including restructuring expense).

Stocks to Consider

While we choose to avoid Varian Medical at present, better-ranked stocks include Edwards Lifesciences (EW) and EnteroMedics (ETRM). Both the stocks hold a Zacks Rank #2 (Buy).