Varex: An Overlooked Spin-Off With 25% Upside

Summary

• Varian’s spin-off Varex is trading at an EV/EBITDA multiple that is a fourth of the industry average despite its market leading position in medical and industrial markets.
• The recent acquisition of PerkinElmer's medical imaging segment offers overlooked opportunities for product cross-selling and manufacturing scale, enabling a potential 30% share price appreciation.
• Enhancement in Varex's international operations will fuel greater margin expansion and top-line revenue growth, even as markets remain fixated on domestic production.

Varex Imaging Corporation (NASDAQ: NASDAQ:VREX) - Current Price: $34.95 | EBITDA: 121.4M | MV: 1.32B

BUY with Target Price Appreciation: Bear: --2.37%, Base: 25.30%, Bull: 32.0

Investment Thesis & Recommendation

Varian's spin-off Varex has hit the ground running, growing into a leading producer in the world's $26 billion dollar diagnostic imaging market. The multi-layered complexity of digital detector and X-ray tube products has stimulated inefficiencies in market pricing of VREX's assets (EV/EBITDA multiple trading at a fourth of the industry average), while the recent acquisition of PerkinElmer's medical imaging business offers overlooked opportunities for product cross-selling and manufacturing scale. With a price target of $42.09, Varex presents an appealing 25.30% upside even without assuming complete utilization of potential synergies with PerkinElmer's medical imaging segment.

Company Overview

Varex is an international designer and manufacturer of cost-effective diagnostic imaging solutions for original equipment manufacturers (OEMs) in medical (82% of sales) and industrial (18% of sales) segments. 1) The Medical Imaging segment manufactures over 100,000 X-ray tubes for four primary medical diagnostic radiology applications: computed tomography ("CT") scanners, radiographic or fluoroscopic imaging, special procedures, and mammography. OEM customers incorporate VREX products into their medical diagnostic, radiation therapy, dental, and veterinary imaging systems. 2) The Industrial business segment designs, manufactures, sells and services X-ray accelerators, imaging processing software, and image detection products for use in security and industrial inspection applications, such as cargo screening and nondestructive examination in a variety of applications. For instance, OEM customers sell the systems with VREX components to customs and other government agencies for use in ports and borders to screen overland, rail, and sea cargo for contraband, weapons, narcotics and explosives, as well as for manifest verification. Varex also sells its Industrial products to commercial enterprises in the casting, power, aerospace, chemical, petro-chemical and automotive industries for nondestructive product examination purposes, such as

Analyst’s Disclosure: I am/we are long VREX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.