Medical equipment manufacturer Varian Medical Systems
The quarterly report contained a few causes for concern. Varian lowered its second-quarter outlook, but maintained the previous annual forecast. These projections do not, however, include the effect of the recently announced acquisition of ACCEL Instruments, which is expected to close in the coming month. Varian stated in the conference call following the earnings release that the acquisition is expected to dilute future earnings, at least in the near term. The slight decrease in gross margins from 41.5% to 41.3% and slight uptick in inventory, from 16% to 17% of sales, likely contributed to the sell-off as well.
Finally, sales growth was almost entirely based on performance in North America, as sales in Europe and Asia were disappointing. In past fiscal years, growth in Europe and Asia had outpaced North America. The company stated that Europe has been slow to replace older radiation systems with the newer and more precise imaging guided radiation therapy (IGRT) systems.
But there was also positive news. The aforementioned replacement of older radiation systems with the IGRT systems continued to drive the growth in the company's oncology business unit. This segment should continue to benefit from favorable demographics and technology-driven instrument upgrades in the future. Innovation has also driven growth in the company's X-ray division, as adoption of the newer flat-screen film free systems has been strong. Varian expects this segment to be a key to growth. The acquisition of the ACCEL proton therapy business should provide growth opportunities and fits well with the existing product lines.
Shareholders can also take solace in the cash-rich balance sheet and Varian's continued share buyback program. While I generally prefer cash dividend payments to share buybacks, I can't fault the program that Varian has had in place over the last few years. The company has effectively reduced the total diluted outstanding share count each of the last three years, and done so at points well below the current share price.
Better buying points may well present themselves in the coming quarter. I would look for growth outside of North America to resume, and keep an eye on the integration of ACCEL. While I do not own shares in Varian, I have chosen a long-term bullish position on the company in Motley Fool CAPS, our investor-driven stock rating service. Varian currently holds CAPS's highest five-star rating, with 58 investors feeling that the company will outperform the S&P 500 index moving forward, and none calling for underperformance.
Looking for the next great advancement in medical devices? Our Motley Fool Rule Breakers newsletter can lead the way. And now you can take the deep look into this newsletter dedicated to up-and-coming companies in emerging fields for a 30-day free trial.