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Looking through the list of top % gainers on the NYSE today, I saw that an old pick of mine, Varian Medical Systems (VAR) had made the list, closing at $35.10, up $1.38 on the day or 4.09%. I do not own any shares nor do I own any options on this company.
I first listed VAR on Stock Picks on 10/20/03, when it was trading at $60.78. VAR had a 2:1 split 8/2/04, making my effective stock pick price $30.39.
According to the Yahoo "Profile" on Varian, the company "...is engaged in designing and manufacturing advanced equipment and software solutions for treating cancer with radiation, as well as cost-effective x-ray tubes for original equipment manufacturers, replacement x-ray tubes and flat-panel digital subsystems for imaging in medical, scientific and industrial applications."
On April 27, 2005, VAR reported 2nd quarter 2005 results. Revenues came in at $351 million, up 9% from the prior year same quarter. Net earnings were $54 million or $.39/diluted share up from $44 million or $.31/diluted share the prior year. In addition, the company reported a strong $395 million of net orders for the quarter, up 13% from last year. The backlog of orders stood at $1.05 billion, up 20% from the prior year!
To top off a great earnings report, the company raised guidance in earnings for fiscal 2005, to a 26% increase expected. Revenue for 2005 should rise 13% over 2004 totals. Subsequent quarter results were also raised with earnings and diluted eps to rise about 20% and revenue to grow by 14%. This was a bullish call and the stock responded!
How about "longer-term"? Taking a look at the "5-Yr Restated" financials on Morningstar.com, we can see the beautiful 'ramp-up' of revenue with the series of violet bars growing with time on the chart, from $0.7 billion in 2000 to $1.2 billion in the trailing twelve months (TTM).
Earnings, except for a slight dip from $.41/share in 200 to $.40/share in 2001, have been steadily growing: $.67 in 2002, $.92 in 2003 and $1.18 in 2004.
Free cash flow has been positive and growing from $130 million in 2002 to $210 million in 2004.
The balance sheet is also solid with $351.9 million in cash and $533.2 million in other current assets, easily covering the $461.3 million in current liabilities AND the $95.1 million in long-term liabilities with about $300 million left over!
What about some "valuation" numbers on this stock? Looking at Yahoo "Key Statistics" for VAR, we can see that this is a large cap stock with a market capitalization of 4.69 Billion. The trailing p/e isn't bad at 26.08, and the forward p/e is also reasonable (fye 1-Oct-06) at 20.77 (imho). Thus the PEG (5 Yr Estimated) is 1.46.
Yahoo shows the Price/Sales ratio at 3.47. Seemingly high, I have started thinking about Paul Sturm from SmartMoney.com on Price/Sales ratios. Instead of looking at them in absolute terms, it is helpful to view valuation in the context of a stock's relative P/S ratio in its industry group.
VAR is in the "Medical Appliances/Equipment" group (per Fidelity), and other stocks in the group have mostly higher Price/Sales ratios: Medtronic (MDT) at 6.3, Zimmer Holdings (ZMH) at 6.3, St. Jude (STJ) at 5.7, Biomet (BMET) at 5.2, and Edwards Life Sciences (EW)(the only stock in this group with a lower price/sales) at 2.9. Thus, by this parameter, VAR looks reasonably valued!
Some other facts from the Yahoo site include the number of shares: 133.56 million, with 132.90 million shares that float. Currently, as of 4/8/05 there are 5.12 million shares out short, representing 3.85% of the float or 4.986 trading days of volume. I have personally been arbitrarily using 3 days as a level of significance, and this stock thus has a significant number of shares out short, which, with the bullish earnings report, adds some buying support for the stock.
No cash dividend is paid, and as I noted above, the last stock split was a 2:1 split in August, 2004.
How about the chart? Taking a look at the Stockcharts.com "Point & Figure" chart
we can see that this stock has generally been quite strong, especially between August, 2000, when it was trading at $11, until late 2002 when it rose to $19.50/share. After that point, the stock soared to a high of $46/share in April, 2004, consolidating throught the last 12 months to its current level of $35.10. Overall, the stock is holding its support line, does NOT appear to be over-extended, and appears strong to me!
What do I think? Well, if I could buy a stock today, this one would probably be high on my list. The stock showed strong price action today, had a great earnings report recently, raised guidance at the same time, has shown consistent earnings and revenue growth, generates growing amounts of free cash flow, and has a solid balance sheet. Valuation-wise, the p/e doesn't look bad, and the Price/Sales ratio makes it relatively cheap within its group. And finally, the chart looks just fine to me!
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