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"Don't let what you cannot do interfere with what you can do."

John Wooden

We like Varian Medical Systems because it is the world's chief manufacturer of medical devices and software for treating cancer and other medical conditions that require radiotherapy, radio surgery, proton therapy and brachytherapy. It has over 6,000 of its liner accelerators for cancer therapy in use around the world. Its security and inspection group is the market leader in high-energy X-ray devices for non-destructive testing and cargo screening.

Its long-term prospects are bright for the following reasons: The service makes up one-third of the oncology department revenues. This is recurring, and management expects this segment to grow as it expands its installed base in China and India. It also introduced the true beam system for image guided radiotherapy and has already landed 425 new orders of which it has installed over 100. This is remarkable because it has managed to market a new product successfully without upsetting sales of existing product lines.

We are bullish on Varian Medical Systems (NYSE:VAR) for the following reasons:

  • A good levered free cash flow of $301 million.
  • Net income has increased from $319 million to $399 million in 2011.
  • EBITDA increased from $523 million in 2009 to $644 million in 2011.
  • Cash flow per share has increased from $3 per share to $3.94 per share.
  • Annual EPS before NRI has almost doubled from $1.84 in 2007 to $3.44 in 2011.
  • Cash flow from operating activities has increased over 50% from $304 million in 2009 to $472 million in 2011.
  • A good ROE of $29.
  • A long-term debt to equity ratio of 0.00.
  • A good five year EPS growth rate of 13.5%.
  • Cash And Cash Equivalents increased from $520 million in 2010 to$564 million in 2011.
  • It has an incredibly strong interest coverage ratio of 158.
  • A decent quick and current ratio of 1.28 and 1.75 respectively.
  • A strong three year total return of 125%.
  • It has a decent free cash flow yield of 4.22%.
  • A 5 year sales growth rate of 9%.
  • It is set to increase its market share in the radiation oncology market. Most international markets are not well equipped to address the growing incidence of cancer. Sales from international markets account for over 50% of its revenues.
  • International Agency for Research on Cancer has estimated that annual cancer rates around the world are projected to increase by 50% to 15 million new cases in the year 2020. This will increase demand for cancer treatments in overseas markets, and Varian is well positioned to benefit from this rise in demand; its ex-United States sales in Asia and Europe are now growing at a much faster rate than in then back home in the U.S.
  • It recently introduced the Truebeam system for image guided radiotherapy. Truebeam is expected to accelerate the replacement of the company's older systems. Since its launch, Varian has already landed 425 new orders for Truebeam; over 100, installations have been completed already. Its ability to effectively commercialize new products such TrueBeam, without upsetting sales of existing product lines is striking.
  • It has very strong relationships with suppliers and clients. Toward the end of 2010, it signed a three year $450 million contract to supply Toshiba Medical systems with medical imaging components from April 2011.
  • Varian continues to experience healthy growth in its order book; backlogs are growing 15% a year over year in fiscal 2011. It is also experiencing strong oncology orders driven by its service business as well as demand for newer accelerators such as the Unique.
  • It has a strong balance sheet - debt levels are minimal, and it has a large cash surplus.
  • It uses part of its strong cash flow on it share repurchase program.
  • One could sell covered calls on Varian and in doing so convert into a dividend paying stock. The premium you receive from selling the calls could be viewed as a dividend. If implemented properly this strategy could produce quite a lucrative stream of revenue in the long run.
  • $100K invested for 10 years would have grown to 376K.

Varian Medical Systems, Inc.

Industry: Medical Instruments and Equipment

Levered Free Cash Flow: 301.75M

Growth

  1. Net income for the past three years
  2. Net Income 2009 = $319 million
  3. Net Income 2010 = $360 million
  4. Net Income 2011 = $399 million
  1. EBITDA 12/2011 = $644 million
  2. EBITDA 12/2010 = $585 million
  3. EBITDA 12/2009 = $523 million
  4. Net income Reported Quarterly = $90 million
  1. Total cash flow from operating activities
  2. 2009 = $304.44 million
  3. 2010 = $460.79 million
  4. 2011 = $472.78 million
  1. Cash Flow 12/2011 = 3.94 $/share
  2. Cash Flow 12/2010 = 3.42 $/share
  3. Cash Flow 12/2009 = 3 $/share
  1. Annual EPS before NRI 12/2011 = 3.44
  2. Annual EPS before NRI 12/2010 = 2.96
  3. Annual EPS before NRI 12/2009 = 2.65
  4. Annual EPS before NRI 12/2008 = 2.31
  5. Annual EPS before NRI 12/2007 = 1.85

Performance

  1. ROE = 29.95%
  2. Return on Assets = 15.99%
  3. Quarterly Earnings Growth = -6.5%
  4. Quarterly Revenue Growth = 7.8%
  1. Price to Sales = 2.96
  2. Price to Book = 5.73
  3. Price to Tangible Book = 6.82
  4. Price to Cash Flow = 17.58
  5. Price to Free Cash Flow = 25
  1. Current Ratio 09/2011 = 1.75
  2. Current Ratio 5 Year Average = 1.83
  3. Quick Ratio = 1.28
  4. Cash Ratio = 0.72
  5. Interest Coverage 09/2011 = 158.61
  1. Total return last 3 years = 126%
  2. Total return last 5 years = 45%

Notes

It falls under the category of "excellent."

Other interesting companies

For investors looking for other ideas we have provided detailed information on four other companies and offered our opinion on each of them.

Company: Provident Enrgy (PVX)

Levered Free Cash Flow = 44.57M

Growth

  1. Net Income ($mil) 12/2011 = 98
  2. Net Income ($mil) 12/2010 = -325
  3. Net Income ($mil) 12/2009 = -78
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 130.06
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = -67.3
  1. EBITDA ($mil) 12/2011 = 212
  2. EBITDA ($mil) 12/2010 = 136
  3. EBITDA ($mil) 12/2009 = 133
  4. Net Income Reported Quarterlytr ($mil) = 21
  5. Annual Net Income this Yr/ Net Income last Yr = 130.24
  6. Cash Flow ($/share) 12/2011 = 0.57
  7. Cash Flow ($/share) 12/2010 = 0.56
  8. Cash Flow ($/share) 12/2009 = 0.75
  1. Sales ($mil) 12/2011 = 1958
  2. Sales ($mil) 12/2010 = 1667
  3. Sales ($mil) 12/2009 = 1665
  1. Annual EPS before NRI 12/2007 = 0.12
  2. Annual EPS before NRI 12/2008 = 1.31
  3. Annual EPS before NRI 12/2009 = -0.3
  4. Annual EPS before NRI 12/2010 = 0.38
  5. Annual EPS before NRI 12/2011 = 0.41

Dividend history

  1. Dividend Yield = 4.7
  2. Dividend Yield 5 Year Average =10.50%
  3. Annual Dividend 12/2011 = 0.55
  4. Annual Dividend 12/2010 = 0.69
  5. Forward Yield = 4.7
  6. 5 year dividend growth rate= -12%

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.84
  2. Payout Ratio 5 Year Average 06/2011 = 4.27
  3. Change in Payout Ratio = -3.43

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 19.75
  2. EPS Growth Quarterly(1)/Q(-3) = 110
  3. ROE 5 Year Average 06/2011 = 8.77
  4. Return on Investment 06/2011 = 15.73
  5. Debt/Total Cap 5 Year Average 06/2011 = 39.14
  1. Current Ratio 06/2011 = 1.1
  2. Current Ratio 5 Year Average = 0.89
  3. Quick Ratio = 0.68
  4. Cash Ratio = 0.03
  5. Interest Coverage =5.00

Valuation

  1. Book Value Quarterly = 2.14
  2. Price/ Book = 5.37
  3. Price/ Cash Flow = 20.29
  4. Price/ Sales = 1.59
  5. EV/EBITDA 12 Mo = 17.28

Notes

It would fall under the category of "good."

PVX is going to be acquired by Pembina pipelines which in our opinion is also a good play. Investors can either purchase Pembina directly or get in through PVX.

Company: Apollo Investment Corp (NASDAQ:AINV)

Levered Free Cash Flow = -157.42M

Basic Key ratios

Percentage Held by Insiders = 0.14

Market Cap ($mil) = 1348

Growth

  1. Net Income ($mil) 12/2011 = 180
  2. Net Income ($mil) 12/2010 = 263
  3. Net Income ($mil) 12/2009 = -612
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = -126.47
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = -24.62
  1. EBITDA ($mil) 12/2011 = 46
  2. EBITDA ($mil) 12/2010 = -275
  3. EBITDA ($mil) 12/2009 = 140
  4. Net Income Reported Quarterlytr ($mil) = 64
  5. Annual Net Income this Yr/ Net Income last Yr = -31.48
  6. Cash Flow ($/share) 12/2011 = 0.04
  7. Cash Flow ($/share) 12/2010 = -2.06
  8. Cash Flow ($/share) 12/2009 = 6.4
  1. Sales ($mil) 12/2011 = 359
  2. Sales ($mil) 12/2010 = 340
  3. Sales ($mil) 12/2009 = 377
  1. Annual EPS before NRI 12/2007 = 1.46
  2. Annual EPS before NRI 12/2008 = 1.88
  3. Annual EPS before NRI 12/2009 = 1.48
  4. Annual EPS before NRI 12/2010 = 1.25
  5. Annual EPS before NRI 12/2011 = 0.99

Dividend history

  1. Dividend Yield = 11.7
  2. Dividend Yield 5 Year Average =14%
  3. Annual Dividend 12/2011 = 1.12
  4. Annual Dividend 12/2010 = 1.1
  5. Forward Yield = 11.7
  6. Dividend 5 year Growth =12.77%

Dividend sustainability

  1. Payout Ratio 06/2011 = 1.23
  2. Payout Ratio 5 Year Average 06/2011 = 1.09
  3. Change in Payout Ratio = 0.14

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -45.17
  2. Next 3-5 Year Estimate EPS Growth rate = 5
  3. EPS Growth Quarterly(1)/Q(-3) = 124
  4. ROE 5 Year Average 06/2011 = 10.62
  5. Return on Investment 06/2011 = 6.16
  6. Debt/Total Cap 5 Year Average 06/2011 = 27.54
  1. Current Ratio 06/2011 = 1.37
  2. Current Ratio 5 Year Average = 1.25
  3. Quick Ratio = 0.75
  4. Cash Ratio = 0.25
  5. Interest Coverage Quarterly = 4.76

Valuation

  1. Book Value Quarterly = 8.16
  2. Price/ Book = 0.84
  3. Price/ Cash Flow = 157.66
  4. Price/ Sales = 3.67
  5. EV/EBITDA 12 Mo = 55.99

Notes

It would fall under the category of "average." Net income, cash flow per share, EBITDA, Sales all took hits in 2011. It also sports a weak quick and cash ratio.

Company: Assured Guaranty Ltd. (NYSE:AGO)

Levered Free Cash Flow = -88.47M

Basic Key ratios

  1. Percentage Held by Insiders = 9.35
  2. Market Cap ($mil) = 2972

Growth

  1. Net Income ($mil) 12/2011 = 776
  2. Net Income ($mil) 12/2010 = 494
  3. Net Income ($mil) 12/2009 = 86
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 35.78
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 46.92
  1. EBITDA ($mil) 12/2011 = 1152
  2. EBITDA ($mil) 12/2010 = 695
  3. EBITDA ($mil) 12/2009 = 202
  4. Net Income Reported Quarterly ($mil) = -84
  5. Annual Net Income this Yr/ Net Income last Yr = 57.1
  6. Cash Flow ($/share) 12/2011 = 3.42
  7. Cash Flow ($/share) 12/2010 = 3.85
  8. Cash Flow ($/share) 12/2009 = 1.88
  1. Sales ($mil) 12/2011 = 1819
  2. Sales ($mil) 12/2010 = 1401
  3. Sales ($mil) 12/2009 = 1182
  1. Annual EPS before NRI 12/2007 = 2.38
  2. Annual EPS before NRI 12/2008 = 0.84
  3. Annual EPS before NRI 12/2009 = 2.45
  4. Annual EPS before NRI 12/2010 = 3.49
  5. Annual EPS before NRI 12/2011 = 3.26

Dividend history

  1. Dividend Yield = 2.21
  2. Dividend Yield 5 Year Average =1.00
  3. Annual Dividend 12/2011 = 0.18
  4. Annual Dividend 12/2010 = 0.18
  5. Forward Yield = 2.21
  6. Dividend 5 year Growth =4.71%

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.06
  2. Payout Ratio 5 Year Average 06/2011 = 0.1
  3. Change in Payout Ratio = -0.04

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 2.74
  2. EPS Growth Quarterly(1)/Q(-3) = -117.28
  3. ROE 5 Year Average 06/2011 = 10.28
  4. Return on Investment 06/2011 = 11.1
  5. Debt/Total Cap 5 Year Average 06/2011 = 16.99
  1. Current Ratio 06/2011 = 0.34
  2. Current Ratio 5 Year Average = 0.4
  3. Quick Ratio = 0.34
  4. Cash Ratio = 0.16
  5. Interest Coverage Quarterly = 43.31

Valuation

  1. Book Value Quarterly = 25.89
  2. Price/ Book = 0.63
  3. Price/ Cash Flow = 4.77
  4. Price/ Sales = 1.67
  5. EV/EBITDA 12 Mo = 2.66

Notes

It would fall under the category of average-good. The reason for this rating is that $100K invested for eight years would have shrunk to 81K. Having said that it looks like the picture is improving a bit going forward. Net income, cash flow per share, sales and EBITDA are all trending upwards.

American Axle & Manufacturing (NYSE:AXL)

Industry: Auto Parts

Levered Free Cash Flow: -164.44M

Net income for the past three years

Net Income 2009 = $-253 million

Net Income 2010 = $115 million

Net Income 2011 = $143 million

EBITDA 12/2011 = $361 million

EBITDA 12/2010 = $339 million

EBITDA 12/2009 = $-78 million

Net income Reported Quarterly = $8 million

Total cash flow from operating activities

2009 = $15.9 million

2010 = $240.3 million

2011 = $-56.3 million

Cash Flow 12/2011 = 3.91 $/share

Cash Flow 12/2010 = 3.48 $/share

Cash Flow 12/2009 = 0.18 $/share

Annual EPS before NRI 12/2011 = 2.06

Annual EPS before NRI 12/2010 = 1.57

Annual EPS before NRI 12/2009 = -2.32

Annual EPS before NRI 12/2008 = -3.51

Annual EPS before NRI 12/2007 = 1.81

Return on Assets = 6.82%

Quarterly Earnings Growth = -10.9%

Quarterly Revenue Growth = 3.8%

Key Ratios

Price to Sales = 0.34

Price to Tangible Book = -1.5

Price to Cash Flow = 2.98

Price to Free Cash Flow = -3.5

Current Ratio 09/2011 = 1.33

Current Ratio 5 Year Average = 1.29

Quick Ratio = 1.02

Cash Ratio = 0.44

Interest Coverage 09/2011 = 2.2

Payout Ratio 09/2011 = 0

Payout Ratio 06/2011 = 0

Payout Ratio 5 Year Average 09/2011 = 0.22

Payout Ratio 5 Year Average 06/2011 = 0.32

Change in Payout Ratio = -0.22

Paying dividends since = 2004

Total return last 3 years = 553.98%

Total return last 5 years = -56.32%

Notes

It would carry a rating of average even though its performance for the last 2-3 years was not bad because if you had invested 100K in this company for 10 years it would have shrunk to 58K. Other potential warning signals: Its inventory is increasing quite dramatically. Finished goods inventory was the fastest growing segment and grew at a pace of 32.5% on trailing-12 month basis. Also on a quarterly basis finished goods inventory was the fastest growing segment. It grew by 11.6%. These two developments could be warning signals. Investors should look at the company's filings to make sure they have a good reason for packing up their warehouses.

EPS, EPS surprise, broker recommendations and price and consensus charts sourced from zacks.com. Earnings estimates and growth rate charts sourced from dailyfinance.com. Free cash flow yield, income from cont operations, and revenue growth sourced from Ycharts.com.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware

Source: Varian Medical Systems: A Good Long-Term Growth Play?