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I am incorrigible.
Back to a trade again. A few moments ago, with the market rally appearing to be strong out of the gate with what appears to be a continuation of yesterday's rally, I decided to see if I could add another trade to the portfolio.
Looking at the list of top % gainers on the NYSE, I came across Varian (VAR), an old favorite of mine, which closed at $53.57, up $4.47 or 9.10% on the day. I say 'old favorite' because I have written about Varian (VAR) on this blog previously--first writing it up on October 20, 2003, and then revisiting Varian on May 11, 2005.
With the market fluctuating and then moving higher after the 'stimulus package' was announced and the President offered comments, it seemed a good time to purchase some shares of Varian and I went ahead and purchased my usual 'over-sized' position of 600 shares at $52.9838 this morning. Early this afternoon, with the market higher and Varian struggling to move ahead, I took my small profit, leaving 100 shares of my original position to stay as part of my Trading Portfolio, selling 500 shares at $53.4054. This worked out to a gain of $.4215/share or .8% on the purchase. With the 500 shares traded, this was a profit of $210.75 on this trade.
Let's take a closer look at Varian and I will explain why
VARIAN MEDICAL SYSTEMS (VAR) IS RATED A BUY
What exactly does Varian Medical do?
According to the Yahoo "Profile" on VAR, the company
"...and its subsidiaries primarily provide cancer therapy systems worldwide. Its Oncology Systems segment designs, manufactures, sells , and services hardware and software products to treat cancer with radiation, including linear accelerators, treatment simulation and verification products, information management and treatment planning software, brachytherapy products and software, and other accessory products and services. It also offers conventional radiotherapy, intensity modulated radiation therapy, image guided radiation therapy, and stereotactic radiotherapy, as well as brachytherapy techniques."
Was there any news to explain today's move?
Varian was the subject of an analyst upgrade today. Leerink Swann upgraded the stock from 'Mkt Perform' to 'Outperform'. The company also jumped in response to the earnings report announced yesterday, after the close of trading.
How did they do in the latest quarterly report?
On January 23, 2008, Varian reported 1st quarter 2008 results. Revenues for the quarter ended December 28, 2007, came in at $459 million, up 18% from the first quarter last year. The backlog stood at $1.7 billion, up 22% from the end of the first quarter the prior year. Net earnings were $.43/diluted share up from $.37/diluted share in the year earlier period. Overall this was $55.5 million in net earnings up from $49.5 million last year.
This result exceeded analysts' expectations of $.40/share on revenue of $436 million according to Thomson Financial. The company raised guidance on the 2nd quarter to $.51/share and revenue growth of 14-16%. This is consistent with the mearn analyst estimate of $.51/share.
For the full year the company also raised guidance for earnings of $2.05 to $2.07 from prior guidance of $2.04 to $2.06, with revenue growth of 14%. Previously they had estimated revenue growth at 10 to 11%. Currently analysts are estimating earnings for 2008 of $2.05/share.
How about longer-term results?
Reviewing the Morningstar.com "5-Yr Restated" financials, we can see a very pretty picture of steady revenue growth from $873 million in 2002 to $1.68 billion in the trailing twelve months (TTM), steady earnings from $.70/share in 2002 to $1.93/share in the TTM, and stable outstanding shares with actually a decrease in shares outstanding from 135 million in 2002 to 127 million as the company bought back shares from the public.
Free cash flow has been positive, if not growing, with $210 million reported in 2004, and $206 million in the TTM.
The balance sheet is solid with $288.8 million in cash and $825.6 in other current assets. This, when compared to the $644.9 million in current liabilities yields a current ratio of 1.73. (From my perspective, ratios above 1.25 are adequately 'healthy'). In addition, there is a relatively small amount of long-term liabilities reported at $81.6 million.
What about some valuation numbers?
Reviewing Yahoo "Key statistics" on VAR, we find that this is a large cap stock with a market capitalization of $6.7 billion. The trailing p/e seems reasonable at 29.23, with a forward p/e (fye 28-Sep--09) estimated at 22.70. The PEG is a tad rich at 1.60.
Checking the Fidelity.com eresearch website, we can see that the Price/Sales (TTM) ratio is reasonable at 3.51 compared to the industry average of 5.16. Also on Fidelity, we find that the Return on Equity (TTM) is more profitable than its peers at 29.55%, compared to the industry average of 25.63%.
Finishing up with Yahoo, we can see that there are 125.12 million shares outstanding with 124.52 million of them that float. As of 12/26/07, there were 3.65 million shares out short, representing a short ratio of 4 days of average trading volume. This is a bit heavier than my 3 day cut-off for significance, so there could well have been a bit of a short squeeze today as the stock climbed higher in the face of good news.
No dividend is paid and the last stock split reported on Yahoo was a 2:1 stock split on August 2, 2004.
What does the chart look like?
Reviewing the 'point & figure' chart on Varian Medical Systems from Stockcharts.com, we can see that the stock which moved strongly ahead from early 2005 when it traded as low as $31, moved to a peak at $61 in January, 2006. Since then the stock has pulled back dropping as low as $38 in September, 2007. Since that dip, the stock appears to be moving higher developing a new area of support. This month, the stock has been under pressure, as have other stocks, but tentatively, the stock appears to be looking to break through resistance into new higher prices.
Summary: What do I think about Varian?
It is really a little hard to like any stock right now. Just as you think you know something about it, the market finds a reason to tear down your position in a quick and devastating fashion.
However, by all of the usual metrics, this is a great stock. Let's review some of the things I have noted above. First of all they reported a great earnings report that beat expectations and they went ahead and raised guidance. An analyst even gave it an upgrade today!
Longer-term, they have grown their revenue steadily, grown their earnings steadily, and have actually decreased their outstanding shares. Free cash flow is solidly positive (if not growing) and the balance sheet appears strong.
Valuation-wise, the p/e is under 30, the PEG is a tad over 1.5, price/sales is below similar companies and the Return on Equity exceeds its peers. There is a slightly significant number of short sellers and the chart appears a little encouraging.
With all of this in mind, I purchased a large position as a trade. As is my new custom, with a successful trade, I left behind a small position which shall enter my Trading Portfolio. Since I have already sold a portion of VAR once, I shall sell my remaining shares should it dip significantly below my cost.
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Regards again and hopefully continued strength in the market in the days ahead.