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Why Is Varian (VAR) Down 4.9% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Varian Medical Systems (VAR). Shares have lost about 4.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Varian due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Varian Q2 Earnings Match Estimates, Margins Pressed

Varian’s second-quarter fiscal 2019 adjusted earnings per share of $1.05 missed the Zacks Consensus Estimate of $1.16. Adjusted earnings declined 8.7% year over year.

The company reported revenues of $779.4 million, which edged past the consensus mark of $779 million. On a year-over-year basis, revenues rose 6.8% and 10% at constant currency (cc). However, revenues were affected by $9 million due to U.S.-China tariffs.

Segment Details

Oncology Systems: Revenues totaled $746.8 million, up 7% year over year and 10% at cc. Operating earnings at the segment declined 8% owing to the impact of tariffs and currency fluctuations.

Varian’s worldwide net installed base had 8,292 units, up by 338 units on a year-over-year basis. As a whole, gross orders grew 15.4% from the year-ago quarter on strength in hardware, software and services.

Geographically, gross orders in Americas increased 7% on a year-over-year basis. In EMEA, gross orders rose 17% year over year, marking the seventh consecutive quarter of double-digit growth for the region. In APAC, gross orders increased 35% 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 2.2% on a year-over-year basis to $32.6 million. However, operating earnings were negatively impacted by $7 million due to impact of tariffs and increased project costs.

Margins

Total gross profit in the reported quarter was $318.2 million, down 0.1% year over year. Gross margin in the reported quarter was 40.8% of net revenues, down 280 basis points (bps).

Research and development expenses rose 0.8% year over year to $59.4 million. Selling, general and administrative expenses increased 6.9% year over year to $149 million.

Adjusted operating income in the fiscal second quarter totaled $109.8 million, up 0.6% year over year. As a percentage of revenues, operating margin was 14.1%, down 80 bps.

Revenue Guidance Raised

Varian raised its guidance for 2019 revenues to $3.09-$3.18 billion from the previously stated range of $3.06-$3.15 billion.

Meanwhile, the view for 2019 adjusted earnings per share has been kept intact.

Varian continues to expect adjusted earnings per share within $4.60-$4.75.

Adjusted operating margin is expected between 17% and 18%, while cash flow from operations is expected within $460 million to $510 million.

Varian Q2 Earnings Match Estimates, Margins Pressed

Varian’s second-quarter fiscal 2019 adjusted earnings per share of $1.05 missed the Zacks Consensus Estimate of $1.16. Adjusted earnings declined 8.7% year over year.

The company reported revenues of $779.4 million, which edged past the consensus mark of $779 million. On a year-over-year basis, revenues rose 6.8% and 10% at constant currency (cc). However, revenues were affected by $9 million due to U.S.-China tariffs.

Segment Details

Oncology Systems: Revenues totaled $746.8 million, up 7% year over year and 10% at cc. Operating earnings at the segment declined 8% owing to the impact of tariffs and currency fluctuations.

Varian’s worldwide net installed base had 8,292 units, up by 338 units on a year-over-year basis. As a whole, gross orders grew 15.4% from the year-ago quarter on strength in hardware, software and services.

Geographically, gross orders in Americas increased 7% on a year-over-year basis. In EMEA, gross orders rose 17% year over year, marking the seventh consecutive quarter of double-digit growth for the region. In APAC, gross orders increased 35% 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 2.2% on a year-over-year basis to $32.6 million. However, operating earnings were negatively impacted by $7 million due to impact of tariffs and increased project costs.

Margins

Total gross profit in the reported quarter was $318.2 million, down 0.1% year over year. Gross margin in the reported quarter was 40.8% of net revenues, down 280 basis points (bps).

Research and development expenses rose 0.8% year over year to $59.4 million. Selling, general and administrative expenses increased 6.9% year over year to $149 million.

Adjusted operating income in the fiscal second quarter totaled $109.8 million, up 0.6% year over year. As a percentage of revenues, operating margin was 14.1%, down 80 bps.

Revenue Guidance Raised

Varian raised its guidance for 2019 revenues to $3.09-$3.18 billion from the previously stated range of $3.06-$3.15 billion.

Meanwhile, the view for 2019 adjusted earnings per share has been kept intact.

Varian continues to expect adjusted earnings per share within $4.60-$4.75.

Adjusted operating margin is expected between 17% and 18%, while cash flow from operations is expected within $460 million to $510 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Varian has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, 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 has been net zero. Notably, Varian has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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