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Varian Medical Systems has been trading near all-time highs lately, but is the company worth that much? Intelligent Investors must continually ask questions like that, and base all investment decisions on fundamental analysis and factual data, in an effort to eliminate risk and speculation. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Varian Medical Systems fares in the ModernGraham valuation model.

VAR Chart

VAR data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - FAIL
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$80.31
MG Value$96.27
MG OpinionFairly Valued
Value Based on 3% Growth$56.35
Value Based on 0% Growth$33.03
Market Implied Growth Rate6.08%
Net Current Asset Value (NCAV)$8.68
PEmg20.67
Current Ratio2.30
PB Ratio4.98

Balance Sheet - 12/27/2013

Current Assets$2,606,300,000
Current Liabilities$1,133,100,000
Total Debt$425,000,000
Total Assets$3,391,200,000
Intangible Assets$227,000,000
Total Liabilities$1,691,600,000
Outstanding Shares105,320,000

Earnings Per Share

2014 (estimate)$4.25
2013$3.98
2012$3.76
2011$3.44
2010$2.96
2009$2.65
2008$2.31
2007$1.83
2006$1.80
2005$1.50
2004$1.18

Earnings Per Share - ModernGraham

2014 (estimate)$3.89
2013$3.59
2012$3.27
2011$2.90
2010$2.52
2009$2.21

Conclusion:

Varian Medical Systems is suitable for the Enterprising Investor, having passed all requirements except the dividend payment requirement. The company is not suitable for the Defensive Investor, due to the lack of dividend payments as well as high PEmg and PB ratios. Enterprising Investors should feel comfortable moving forward with further research into the company, including a review of ModernGraham's valuation of General Electric, and other companies that pass the ModernGraham requirements. From a valuation perspective, the company appears fairly valued after growing its EPSmg (normalized earnings) from $2.21 in 2009 to an estimated $3.89. This level of growth is supportive of the market's implied estimate of 6.08%, leading the ModernGraham valuation model to return an intrinsic value estimate within a margin of safety in comparison to the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Varian Medical Systems Inc.? Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author did not hold a position in Varian Medical Systems Inc. (NYSE:VAR) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Varian Medical Systems Inc.