Intrinsic value of Varex Imaging - VREX

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$33.56

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$33.56

 
Intrinsic value

$28.16

 
Up/down potential

-16%

 
Rating

hold

 
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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of VREX stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -1.90
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  620
  632
  647
  664
  682
  703
  726
  750
  777
  806
  837
  870
  905
  943
  983
  1,025
  1,070
  1,118
  1,168
  1,221
  1,277
  1,336
  1,399
  1,465
  1,534
  1,607
  1,684
  1,765
  1,850
  1,940
  2,034
Variable operating expenses, $m
 
  505
  516
  529
  544
  560
  578
  597
  618
  641
  665
  684
  711
  741
  772
  806
  841
  878
  918
  960
  1,004
  1,050
  1,099
  1,151
  1,206
  1,263
  1,323
  1,387
  1,454
  1,524
  1,598
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  511
  505
  516
  529
  544
  560
  578
  597
  618
  641
  665
  684
  711
  741
  772
  806
  841
  878
  918
  960
  1,004
  1,050
  1,099
  1,151
  1,206
  1,263
  1,323
  1,387
  1,454
  1,524
  1,598
Operating income, $m
  109
  128
  131
  135
  139
  143
  148
  153
  159
  165
  172
  186
  194
  202
  210
  219
  229
  239
  250
  261
  273
  286
  299
  314
  328
  344
  361
  378
  396
  415
  435
EBITDA, $m
  125
  146
  149
  153
  157
  162
  167
  173
  179
  186
  193
  200
  208
  217
  226
  236
  246
  257
  269
  281
  294
  308
  322
  337
  353
  370
  388
  406
  426
  447
  468
Interest expense (income), $m
  0
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  3
  3
  3
  4
  4
  4
  5
  5
  5
  6
  6
  7
  7
Earnings before tax, $m
  105
  128
  131
  134
  138
  143
  147
  153
  158
  164
  171
  185
  192
  200
  209
  218
  227
  237
  247
  258
  270
  283
  296
  309
  324
  339
  355
  372
  390
  409
  428
Tax expense, $m
  36
  35
  35
  36
  37
  39
  40
  41
  43
  44
  46
  50
  52
  54
  56
  59
  61
  64
  67
  70
  73
  76
  80
  84
  87
  92
  96
  100
  105
  110
  116
Net income, $m
  69
  93
  96
  98
  101
  104
  108
  111
  115
  120
  125
  135
  140
  146
  152
  159
  166
  173
  181
  189
  197
  206
  216
  226
  236
  248
  259
  272
  285
  298
  313

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  37
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  622
  597
  610
  626
  644
  663
  685
  708
  733
  760
  789
  821
  854
  889
  927
  967
  1,010
  1,054
  1,102
  1,152
  1,205
  1,261
  1,320
  1,382
  1,447
  1,516
  1,589
  1,665
  1,745
  1,830
  1,919
Adjusted assets (=assets-cash), $m
  585
  597
  610
  626
  644
  663
  685
  708
  733
  760
  789
  821
  854
  889
  927
  967
  1,010
  1,054
  1,102
  1,152
  1,205
  1,261
  1,320
  1,382
  1,447
  1,516
  1,589
  1,665
  1,745
  1,830
  1,919
Revenue / Adjusted assets
  1.060
  1.059
  1.061
  1.061
  1.059
  1.060
  1.060
  1.059
  1.060
  1.061
  1.061
  1.060
  1.060
  1.061
  1.060
  1.060
  1.059
  1.061
  1.060
  1.060
  1.060
  1.059
  1.060
  1.060
  1.060
  1.060
  1.060
  1.060
  1.060
  1.060
  1.060
Average production assets, $m
  125
  128
  131
  134
  138
  142
  147
  152
  157
  163
  169
  176
  183
  190
  199
  207
  216
  226
  236
  247
  258
  270
  283
  296
  310
  325
  340
  356
  374
  392
  411
Working capital, $m
  282
  250
  256
  262
  269
  278
  287
  296
  307
  318
  331
  344
  358
  372
  388
  405
  423
  441
  461
  482
  504
  528
  553
  579
  606
  635
  665
  697
  731
  766
  803
Total debt, $m
  0
  2
  4
  7
  10
  13
  16
  20
  24
  29
  33
  39
  44
  50
  56
  63
  70
  77
  85
  93
  102
  111
  120
  131
  141
  153
  165
  177
  190
  204
  219
Total liabilities, $m
  96
  98
  100
  103
  106
  109
  112
  116
  120
  125
  129
  135
  140
  146
  152
  159
  166
  173
  181
  189
  198
  207
  216
  227
  237
  249
  261
  273
  286
  300
  315
Total equity, $m
  526
  499
  510
  523
  538
  554
  572
  592
  613
  636
  660
  686
  714
  744
  775
  809
  844
  881
  921
  963
  1,007
  1,054
  1,103
  1,155
  1,210
  1,267
  1,328
  1,392
  1,459
  1,530
  1,604
Total liabilities and equity, $m
  622
  597
  610
  626
  644
  663
  684
  708
  733
  761
  789
  821
  854
  890
  927
  968
  1,010
  1,054
  1,102
  1,152
  1,205
  1,261
  1,319
  1,382
  1,447
  1,516
  1,589
  1,665
  1,745
  1,830
  1,919
Debt-to-equity ratio
  0.000
  0.000
  0.010
  0.010
  0.020
  0.020
  0.030
  0.030
  0.040
  0.050
  0.050
  0.060
  0.060
  0.070
  0.070
  0.080
  0.080
  0.090
  0.090
  0.100
  0.100
  0.110
  0.110
  0.110
  0.120
  0.120
  0.120
  0.130
  0.130
  0.130
  0.140
Adjusted equity ratio
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836
  0.836

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  69
  93
  96
  98
  101
  104
  108
  111
  115
  120
  125
  135
  140
  146
  152
  159
  166
  173
  181
  189
  197
  206
  216
  226
  236
  248
  259
  272
  285
  298
  313
Depreciation, amort., depletion, $m
  16
  18
  18
  18
  19
  19
  19
  20
  20
  21
  21
  14
  15
  15
  16
  17
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  29
  30
  31
  33
Funds from operations, $m
  48
  111
  114
  116
  120
  123
  127
  131
  136
  140
  146
  149
  155
  161
  168
  175
  183
  191
  199
  208
  218
  228
  238
  249
  261
  274
  286
  300
  315
  330
  346
Change in working capital, $m
  -26
  5
  6
  7
  7
  8
  9
  10
  11
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  25
  26
  27
  29
  30
  32
  34
  35
  37
Cash from operations, $m
  74
  111
  108
  110
  112
  115
  118
  121
  125
  129
  133
  136
  141
  147
  152
  159
  165
  172
  180
  187
  196
  204
  214
  224
  234
  245
  256
  268
  281
  294
  308
Maintenance CAPEX, $m
  0
  -10
  -10
  -10
  -11
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -31
New CAPEX, $m
  -29
  -3
  -3
  -3
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -16
  -17
  -18
  -19
Cash from investing activities, $m
  -22
  -13
  -13
  -13
  -15
  -15
  -16
  -17
  -17
  -19
  -19
  -21
  -21
  -23
  -23
  -25
  -26
  -27
  -28
  -30
  -31
  -33
  -35
  -36
  -38
  -40
  -42
  -43
  -46
  -48
  -50
Free cash flow, $m
  52
  98
  95
  96
  98
  100
  102
  105
  107
  111
  114
  116
  120
  124
  129
  134
  140
  145
  151
  158
  165
  172
  180
  188
  196
  205
  215
  225
  235
  246
  258
Issuance/(repayment) of debt, $m
  0
  2
  2
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -37
  2
  2
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
Total cash flow (excl. dividends), $m
  16
  100
  97
  99
  101
  103
  105
  108
  112
  115
  119
  121
  125
  130
  135
  141
  146
  153
  159
  166
  173
  181
  189
  198
  207
  216
  227
  237
  248
  260
  272
Retained Cash Flow (-), $m
  -41
  -10
  -11
  -13
  -15
  -16
  -18
  -19
  -21
  -23
  -24
  -26
  -28
  -30
  -32
  -33
  -35
  -38
  -40
  -42
  -44
  -47
  -49
  -52
  -55
  -58
  -61
  -64
  -67
  -71
  -74
Prev. year cash balance distribution, $m
 
  37
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  128
  85
  85
  86
  87
  88
  89
  90
  92
  95
  95
  98
  101
  104
  107
  111
  115
  119
  124
  129
  134
  140
  146
  152
  159
  166
  173
  181
  189
  198
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  122
  78
  74
  71
  67
  64
  60
  57
  53
  50
  45
  42
  38
  35
  31
  28
  25
  22
  19
  16
  14
  12
  10
  8
  6
  5
  4
  3
  2
  1
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Varex Imaging Corporation designs and manufactures medical X-ray tubes and image processing solutions. The company offers X-ray imaging components, such as tubes, digital flat panel detectors, and other image processing solutions, which are key components of X-ray imaging systems. Its components are used in medical imaging, as well as in industrial and security imaging applications. The company offers various medical imaging component products, including replacement X-ray tubes, OEM X-ray tubes, flat panel detectors, software solutions, Claymount high voltage connections, Claymount AEC sensors, Claymount collimators, and Claymount bucky systems, as well as components for cardiac, computed tomography (CT), dental, mammography, and radiography and fluoroscopy systems. Its imaging component products for security and industrial imaging needs include linear accelerators, industrial X-ray tubes, detectors, Attila software, industrial CT scanning services, and Claymount high voltage connections. The company has operations in North America, Europe, and Asia. Varex Imaging Corporation is headquartered in Salt Lake City, Utah.

FINANCIAL RATIOS  of  Varex Imaging (VREX)

Valuation Ratios
P/E Ratio 18.2
Price to Sales 2
Price to Book 2.4
Price to Tangible Book
Price to Cash Flow 17
Price to Free Cash Flow 27.9
Growth Rates
Sales Growth Rate -1.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -14.7%
Cap. Spend. - 3 Yr. Gr. Rate 29.4%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 11.4%
Ret/ On Assets - 3 Yr. Avg. 26%
Return On Total Capital 13.6%
Ret/ On T. Cap. - 3 Yr. Avg. 31.3%
Return On Equity 13.6%
Return On Equity - 3 Yr. Avg. 31.3%
Asset Turnover 1
Profitability Ratios
Gross Margin 40%
Gross Margin - 3 Yr. Avg. 40.1%
EBITDA Margin 19.5%
EBITDA Margin - 3 Yr. Avg. 22.9%
Operating Margin 17.6%
Oper. Margin - 3 Yr. Avg. 21.1%
Pre-Tax Margin 16.9%
Pre-Tax Margin - 3 Yr. Avg. 20.9%
Net Profit Margin 11.1%
Net Profit Margin - 3 Yr. Avg. 13.3%
Effective Tax Rate 34.3%
Eff/ Tax Rate - 3 Yr. Avg. 35.9%
Payout Ratio 0%

VREX stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the VREX stock intrinsic value calculation we used $620 million for the last fiscal year's total revenue generated by Varex Imaging. The default revenue input number comes from 2016 income statement of Varex Imaging. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our VREX stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for VREX is calculated based on our internal credit rating of Varex Imaging, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Varex Imaging.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of VREX stock the variable cost ratio is equal to 79.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for VREX stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Varex Imaging.

Corporate tax rate of 27% is the nominal tax rate for Varex Imaging. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the VREX stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for VREX are equal to 20.2%.

Life of production assets of 12.5 years is the average useful life of capital assets used in Varex Imaging operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for VREX is equal to 39.5%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $526 million for Varex Imaging - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 37.798 million for Varex Imaging is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Varex Imaging at the current share price and the inputted number of shares is $1.3 billion.


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