On Apr 1, 2015, Zacks Investment Research downgraded Varian Medical Systems (VAR) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Varian Medical’s disappointing 2015 outlook was the primary reason that induced the rank downgrade. The company currently expects revenues to increase approximately 5% from the year-ago quarter (down from earlier guidance of 5% to 6% range). Meanwhile, the company reiterated the EPS guidance range at $4.16 to $4.26.
Foreign currency volatility is expected to negatively impact the company’s fiscal year results (20 cents negative impact to EPS in the rest of the year). SG&A expenses, as a percentage of sales, are expected to remain at around 15% for the next three quarters.
On the geographic front, Varian Medical estimates low to mid-single digit growth opportunity in the North America over the long haul. The company believes that the spending environment in the U.S. is improving slowly. However, Varian Medical expects consolidation to continue in the industry.
For the second quarter of fiscal 2015, Varian Medical forecasts EPS in the range of 98 cents to $1.02. EPS for the quarter will be negatively impacted by unfavorable geographic mix (5 cents) and foreign exchange headwind (6 cents). Revenues are likely to increase 2% from the year-ago quarter.
We believe that a weak second-quarter outlook will remain an overhang on the stock. Meanwhile, rising SG&A expenses will continue to hurt the bottom line. Moreover, increasing competition in the Oncology market is a major concern.
Estimate Revision
Given the present headwinds, analysts remain reasonably apprehensive, as is evident from the downward estimate revisions. Over the last 60 days, the Zacks Consensus Estimate fell 0.7% (3 cents) to $4.28 per share for full-year 2015 while the same for 2016 declined 4.3% (21 cents) to $4.70 per share.
Stocks to Consider
While we choose to avoid Varian Medical at present, better-ranked stocks in the sector include Inogen INGN, Abiomed ABMD and Edwards Lifesciences EW. While Inogen sports a Zacks Rank #1 (Strong Buy), Abiomed and Edwards Lifesciences hold a Zacks Rank #2 (Buy).
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