Chuan Bai's  Instablog

Varian Medical Systems (VAR) is such a great investment that you can't miss even after the great rise last Friday. The company is the leader in radiotherapy medical equipment manufacturer. Its competitors include Elekta AB, Siemens Medical Solutions, Accuray Incorporated. Varian produces the most advanced oncology equipment (78% of VAR FY11 revenue) in the industry. The complex equipment includes both hardware and software which makes its clients have a higher switching cost compares with other simple medical equipment. The regulatory approval on these lethal machines creates another entry barrier to this industry (watch out for the Japanese machine suppliers). With all these edges, Varian is also moving to emerging markets, which has great appearance in China and performing training session in India.

"China, India and Brazil are estimated to have less than one linear accelerator per million people in their population. By comparison, the United States has an estimated 13 linear accelerators per million people in its population. This capacity shortfall, coupled with ever increasing incidences of cancer, represents additional drivers for our continued growth in international markets." - Varian 10K report

There is a huge market potential for Varian to grow, along with its entry, technology and regulatory barrier. Varian can keep milking a great margin out of the machines, and it did over decades.

There's another interesting point about Varian. Unlike most of its peers in medical equipment manufacturers, Varian is able to hold on with its customers with a smaller than average sales force (30% compares with ~50%). This is another proof that Varian has a strong enough barrier to fend off its competitors. A slightly higher R&D spending strengthens the barrier even further.

The aggressive stock buyback operation in the last three year is a sign that management team is conscious about stockholder. The $898m buyback from 2010 till mid-2012 is a tall order considering the company only has equity of $1.5b and 10.68% debt to equity ratio. This is all made possible because of the $400m FCF generated.

The possible business downsides of Varian are changes in tax and hospital spending reimbursement due to Obama Care.

Based on this fundamental analysis, Varian is a worthwhile investment for any value investors. The fair value of Varian is calculated to be $71. So grab your share of Varian Medical Systems when the price is right for you.

Disclosure: I am long VAR, CHKP, MMM.