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GlassHouse Research: Varian Medical System's Earnings May Be 'Cosmetically Enhanced'

GlassHouse Research: Varian Medical System's Earnings May Be 'Cosmetically Enhanced'

Medical device stock Varian Medical Systems, Inc. (NYSE: VAR)’s share price may be artificially inflated due to what GlassHouse Research says are “enhanced” earnings.

Back in October 2016, reported General Electric Company (NYSE: GE) was negotiating a potential buyout of Varian at a price of between $11 billion and $12 billion. The rumors initially sent shares as high as $106.70, but the deal was never completed.

Around the same time the negotiations were reported, GlassHouse noticed what it sees as several accounting red flags for Varian, such as financing customers’ Proton Centers, relaxing credit standards, pulling revenue forward and not impairing obsolete inventory.

“And with VAR’s failed attempt at a sale at the end of FY2016, GHR analysts believe that the impact of many of these accounting gimmicks will reverse violently over the next twelve months,” GlassHouse explained.

Lingering Concerns: Metrics And Insider Trading

The firm noted that Varian’s cash flow metrics have taken a turn for the worse in recent years.

GlassHouse also said Varian is having trouble finding customers for its self-financed Proton Therapy Centers, putting $130.6 million in loans at risk.

In addition, receivables are now at their highest level since 2008.

“With VAR’s overall receivables portfolio (including loans) constituting a current mess, the firm’s risky and highly subjective receivables increased 41.1 percent while deferred revenues plummeted by 74.5 percent in FY2016,” GlassHouse said.

As demand for outdated inventory falls, the firm said Variant’s 10-year high DSI balance of 138 days is an indication that the company is not writing off obsolete inventory.

Finally, GlassHouse said CEO Dow Wilson and other insiders unloading shares of stock over the past six months is an indication that even company management sees the writing on the wall.

GlassHouse believes a major correction is ahead for Variant in 2017 and has a $51.75 price target for the stock.

According to its website, ​GlassHouse Research is made up of forensic accountants and analysts that have worked for prominent hedge funds and boutique forensic accounting firms.

"Our purpose is to expose fraudulent companies that have been taking advantage of US GAAP as well as IFRS accounting for their benefit. We seek to find companies where GAAP (or even worse non-GAAP) earnings are deviating from true economic earnings of the target firm," the site says.

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