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Varian Medical Systems (VAR) is slated to report its second-quarter fiscal 2011 (ending March 31) results on Wednesday, April 27. The company had earlier forecast earnings per share in the range of 83 cents to 86 cents for the quarter. The current Zacks Consensus Estimate for the second quarter is 85 cents, representing an estimated year over year increase of 16.71%.

First Quarter Recap

Varian’s top line witnessed a 7% increase to reach $579.9 million in the first quarter, missing the Zacks Consensus Estimate of $584 million. Its net orders increased smartly 20% year over year to $592.8 million with order backlog rose 10% to $2.2 billion.

Oncology Systems’ revenues grew 5% year over year to $452 million. Cumulative orders for the TrueBeam systems increased to more than 170 units. Varian’s X-Ray Products business had a strong quarter with revenues jumping 22% year over year to $112 million. Sales in the “Other” category, however, dropped 19% year over year to $16 million.

Estimate Revision Trend

Agreement

Among the 10 analysts covering the stock, there were no estimate revisions, for the current quarter, over the past week or month. Of the 11 analysts covering the stock, there were no estimate revisions, for fiscal 2011, over the past week while there was just 1 upward revision during the course of the month. The current Zacks Consensus Estimate for fiscal year 2011 is $3.47, reflecting an estimated 17.11% year-over-year growth.  

Magnitude

Given the lack of estimate revisions, the magnitude of revision for the second quarter has been static over the last week and month. Estimates for fiscal 2011 have remained stagnant over the past week and increased by only a penny over the past month. Varian has generated average positive earnings surprise of 8.59% over the prior four quarters, meaning that it beat the Zacks Consensus Estimate by that measure. 

Our Take on Varian

Varian is a leading manufacturer of integrated radiotherapy systems for treating cancer and a premier supplier of X-ray tubes for diagnostic imaging applications. The company operates in a technology-driven environment where success depends on the use of new technology, product development and upgrades. In the radiation oncology market, Varian competes with Accuray (ARAY) and TomoTherapy (TOMO).

Varian is poised to increase its market share in radiation oncology. It is currently enjoying a healthy demand for its coveted RapidArc and TrueBeam radiotherapy technology, which is meaningfully contributing to its oncology net order growth.

International markets are under-equipped to address the growing incidence of cancer.  In line with growing demand for cancer treatment in overseas markets, Varian’s ex-U.S. sales, in Europe and particularly Asia, are growing at a noticeable pace. The company is paying special attention to serving more hospitals in China and India.

The X-Ray Products segment has been a good performer enjoying high growth rates. It has been at the forefront in finding niches in industrial and security-related areas. In January 2011, Varian announced a sizeable $450 million contract, over a 3-year timeframe, to supply medical imaging subcomponents to Toshiba Medical Systems.

However, Varian aggressively competes with well-funded competitors for a limited pool of sales volume. Further, uncertainties stemming from health care reform and a still weak hospital capital spending environment across many developed countries, especially in Europe, provide headwinds.

We currently have a Neutral recommendation on Varian over the long term.  The stock currently has a Zacks #2 Rank, which translates into a short-term Buy recommendation.

 
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