Intrinsic value of Varian Medical Systems - VAR

Previous Close

$111.21

  Intrinsic Value

$47.06

stock screener

  Rating & Target

str. sell

-58%

Previous close

$111.21

 
Intrinsic value

$47.06

 
Up/down potential

-58%

 
Rating

str. sell

We calculate the intrinsic value of VAR 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 2017), $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 10.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  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
  2,721
  2,784
  2,855
  2,936
  3,025
  3,122
  3,229
  3,344
  3,468
  3,601
  3,743
  3,895
  4,057
  4,229
  4,411
  4,605
  4,809
  5,026
  5,255
  5,496
  5,751
  6,019
  6,303
  6,601
  6,915
  7,246
  7,594
  7,961
  8,346
  8,752
Variable operating expenses, $m
  2,269
  2,321
  2,379
  2,446
  2,519
  2,599
  2,687
  2,781
  2,883
  2,993
  3,081
  3,206
  3,339
  3,480
  3,631
  3,790
  3,958
  4,136
  4,324
  4,523
  4,733
  4,954
  5,187
  5,432
  5,691
  5,963
  6,250
  6,552
  6,869
  7,203
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
  2,269
  2,321
  2,379
  2,446
  2,519
  2,599
  2,687
  2,781
  2,883
  2,993
  3,081
  3,206
  3,339
  3,480
  3,631
  3,790
  3,958
  4,136
  4,324
  4,523
  4,733
  4,954
  5,187
  5,432
  5,691
  5,963
  6,250
  6,552
  6,869
  7,203
Operating income, $m
  452
  463
  476
  490
  506
  523
  542
  563
  584
  608
  663
  690
  718
  749
  781
  815
  851
  890
  930
  973
  1,018
  1,066
  1,116
  1,168
  1,224
  1,283
  1,344
  1,409
  1,477
  1,549
EBITDA, $m
  538
  551
  565
  581
  598
  618
  639
  661
  686
  712
  741
  771
  803
  837
  873
  911
  951
  994
  1,039
  1,087
  1,138
  1,191
  1,247
  1,306
  1,368
  1,433
  1,502
  1,575
  1,651
  1,731
Interest expense (income), $m
  9
  19
  21
  23
  26
  28
  32
  35
  39
  43
  48
  52
  57
  63
  69
  75
  81
  88
  96
  104
  112
  120
  130
  139
  149
  160
  171
  183
  196
  209
  223
Earnings before tax, $m
  433
  443
  453
  465
  478
  492
  507
  524
  541
  560
  610
  632
  655
  680
  706
  734
  763
  794
  827
  861
  898
  936
  976
  1,019
  1,064
  1,111
  1,161
  1,213
  1,268
  1,326
Tax expense, $m
  117
  120
  122
  125
  129
  133
  137
  141
  146
  151
  165
  171
  177
  184
  191
  198
  206
  214
  223
  232
  242
  253
  264
  275
  287
  300
  313
  328
  342
  358
Net income, $m
  316
  323
  331
  339
  349
  359
  370
  382
  395
  409
  446
  461
  478
  496
  515
  536
  557
  580
  603
  629
  655
  683
  713
  744
  777
  811
  848
  886
  926
  968

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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 assets, $m
  3,360
  3,437
  3,525
  3,624
  3,734
  3,855
  3,986
  4,128
  4,281
  4,446
  4,622
  4,809
  5,009
  5,221
  5,446
  5,685
  5,938
  6,205
  6,487
  6,785
  7,100
  7,431
  7,781
  8,149
  8,537
  8,946
  9,376
  9,828
  10,304
  10,805
Adjusted assets (=assets-cash), $m
  3,360
  3,437
  3,525
  3,624
  3,734
  3,855
  3,986
  4,128
  4,281
  4,446
  4,622
  4,809
  5,009
  5,221
  5,446
  5,685
  5,938
  6,205
  6,487
  6,785
  7,100
  7,431
  7,781
  8,149
  8,537
  8,946
  9,376
  9,828
  10,304
  10,805
Revenue / Adjusted assets
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
Average production assets, $m
  566
  579
  594
  611
  629
  649
  672
  696
  721
  749
  779
  810
  844
  880
  918
  958
  1,000
  1,045
  1,093
  1,143
  1,196
  1,252
  1,311
  1,373
  1,438
  1,507
  1,580
  1,656
  1,736
  1,820
Working capital, $m
  261
  267
  274
  282
  290
  300
  310
  321
  333
  346
  359
  374
  389
  406
  424
  442
  462
  482
  504
  528
  552
  578
  605
  634
  664
  696
  729
  764
  801
  840
Total debt, $m
  384
  426
  474
  527
  586
  651
  722
  799
  881
  970
  1,065
  1,166
  1,273
  1,388
  1,509
  1,638
  1,774
  1,918
  2,070
  2,231
  2,400
  2,579
  2,768
  2,966
  3,175
  3,395
  3,627
  3,871
  4,127
  4,397
Total liabilities, $m
  1,811
  1,853
  1,900
  1,954
  2,013
  2,078
  2,149
  2,225
  2,308
  2,396
  2,491
  2,592
  2,700
  2,814
  2,936
  3,064
  3,200
  3,344
  3,497
  3,657
  3,827
  4,005
  4,194
  4,392
  4,602
  4,822
  5,053
  5,297
  5,554
  5,824
Total equity, $m
  1,549
  1,584
  1,625
  1,671
  1,722
  1,777
  1,838
  1,903
  1,974
  2,049
  2,131
  2,217
  2,309
  2,407
  2,511
  2,621
  2,737
  2,860
  2,991
  3,128
  3,273
  3,426
  3,587
  3,757
  3,936
  4,124
  4,322
  4,531
  4,750
  4,981
Total liabilities and equity, $m
  3,360
  3,437
  3,525
  3,625
  3,735
  3,855
  3,987
  4,128
  4,282
  4,445
  4,622
  4,809
  5,009
  5,221
  5,447
  5,685
  5,937
  6,204
  6,488
  6,785
  7,100
  7,431
  7,781
  8,149
  8,538
  8,946
  9,375
  9,828
  10,304
  10,805
Debt-to-equity ratio
  0.250
  0.270
  0.290
  0.320
  0.340
  0.370
  0.390
  0.420
  0.450
  0.470
  0.500
  0.530
  0.550
  0.580
  0.600
  0.620
  0.650
  0.670
  0.690
  0.710
  0.730
  0.750
  0.770
  0.790
  0.810
  0.820
  0.840
  0.850
  0.870
  0.880
Adjusted equity ratio
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461
  0.461

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  316
  323
  331
  339
  349
  359
  370
  382
  395
  409
  446
  461
  478
  496
  515
  536
  557
  580
  603
  629
  655
  683
  713
  744
  777
  811
  848
  886
  926
  968
Depreciation, amort., depletion, $m
  86
  87
  89
  90
  92
  94
  97
  99
  102
  104
  78
  81
  84
  88
  92
  96
  100
  105
  109
  114
  120
  125
  131
  137
  144
  151
  158
  166
  174
  182
Funds from operations, $m
  402
  410
  420
  430
  441
  453
  467
  481
  497
  513
  523
  542
  563
  584
  607
  631
  657
  684
  713
  743
  775
  808
  844
  881
  921
  962
  1,005
  1,051
  1,100
  1,150
Change in working capital, $m
  5
  6
  7
  8
  9
  9
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  29
  30
  32
  33
  35
  37
  39
Cash from operations, $m
  397
  404
  413
  422
  432
  444
  456
  470
  485
  501
  510
  528
  547
  568
  590
  613
  637
  663
  691
  720
  750
  783
  817
  853
  890
  930
  972
  1,016
  1,063
  1,111
Maintenance CAPEX, $m
  -56
  -57
  -58
  -59
  -61
  -63
  -65
  -67
  -70
  -72
  -75
  -78
  -81
  -84
  -88
  -92
  -96
  -100
  -105
  -109
  -114
  -120
  -125
  -131
  -137
  -144
  -151
  -158
  -166
  -174
New CAPEX, $m
  -10
  -13
  -15
  -17
  -19
  -20
  -22
  -24
  -26
  -28
  -30
  -32
  -34
  -36
  -38
  -40
  -43
  -45
  -48
  -50
  -53
  -56
  -59
  -62
  -65
  -69
  -72
  -76
  -80
  -84
Cash from investing activities, $m
  -66
  -70
  -73
  -76
  -80
  -83
  -87
  -91
  -96
  -100
  -105
  -110
  -115
  -120
  -126
  -132
  -139
  -145
  -153
  -159
  -167
  -176
  -184
  -193
  -202
  -213
  -223
  -234
  -246
  -258
Free cash flow, $m
  332
  335
  340
  346
  353
  361
  369
  379
  389
  401
  405
  418
  433
  448
  464
  481
  499
  518
  539
  560
  583
  607
  633
  659
  688
  717
  749
  782
  817
  853
Issuance/(repayment) of debt, $m
  34
  42
  48
  53
  59
  65
  71
  77
  83
  89
  95
  101
  108
  114
  121
  129
  136
  144
  152
  161
  170
  179
  188
  199
  209
  220
  232
  244
  257
  270
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
Cash from financing (excl. dividends), $m  
  34
  42
  48
  53
  59
  65
  71
  77
  83
  89
  95
  101
  108
  114
  121
  129
  136
  144
  152
  161
  170
  179
  188
  199
  209
  220
  232
  244
  257
  270
Total cash flow (excl. dividends), $m
  366
  376
  387
  399
  412
  426
  440
  456
  472
  489
  500
  519
  540
  562
  585
  609
  635
  662
  691
  721
  753
  786
  821
  858
  897
  938
  981
  1,026
  1,073
  1,123
Retained Cash Flow (-), $m
  -31
  -36
  -41
  -46
  -51
  -56
  -61
  -66
  -71
  -76
  -81
  -86
  -92
  -98
  -104
  -110
  -116
  -123
  -130
  -137
  -145
  -153
  -161
  -170
  -179
  -188
  -198
  -209
  -219
  -231
Prev. year cash balance distribution, $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 flow adjustment, $m
  40
  41
  42
  43
  44
  45
  47
  48
  50
  52
  54
  56
  58
  61
  63
  66
  69
  72
  75
  79
  82
  86
  90
  95
  99
  104
  109
  114
  119
  125
Cash available for distribution, $m
  335
  341
  347
  354
  361
  370
  380
  390
  401
  414
  419
  433
  448
  464
  481
  499
  519
  539
  561
  583
  608
  633
  660
  688
  718
  749
  782
  817
  854
  892
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
  322
  312
  302
  291
  280
  269
  256
  244
  231
  217
  199
  185
  170
  156
  141
  127
  113
  99
  86
  74
  63
  53
  43
  35
  28
  22
  17
  13
  9
  7
Current shareholders' claim on cash, %
  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

Varian Medical Systems, Inc. is a manufacturer of medical devices and software for treating cancer and other medical conditions with radiotherapy, radiosurgery, proton therapy and brachytherapy medical devices and software for treating cancer and other medical conditions with radiotherapy, radiosurgery, proton therapy and brachytherapy. The Company also has Varian Particle Therapy (VPT) and the operations of the Ginzton Technology Center (GTC). Its VPT business develops, designs, manufactures, sells and services products and systems for delivering proton therapy, another form of external beam radiotherapy using proton beams for the treatment of cancer. Its ProBeam system is capable of delivering intensity modulated proton therapy (IMPT) using pencil beam scanning technology. Its ProBeam Compact is a single room proton therapy product.

FINANCIAL RATIOS  of  Varian Medical Systems (VAR)

Valuation Ratios
P/E Ratio 40.8
Price to Sales 3.8
Price to Book 6.8
Price to Tangible Book
Price to Cash Flow 25.6
Price to Free Cash Flow 30
Growth Rates
Sales Growth Rate 1.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -26.3%
Cap. Spend. - 3 Yr. Gr. Rate -8.1%
Financial Strength
Quick Ratio 2
Current Ratio 0
LT Debt to Equity 0%
Total Debt to Equity 23.4%
Interest Coverage 39
Management Effectiveness
Return On Assets 7.3%
Ret/ On Assets - 3 Yr. Avg. 10.2%
Return On Total Capital 11.8%
Ret/ On T. Cap. - 3 Yr. Avg. 16.2%
Return On Equity 15.5%
Return On Equity - 3 Yr. Avg. 21.2%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 43.3%
Gross Margin - 3 Yr. Avg. 42.4%
EBITDA Margin 16.2%
EBITDA Margin - 3 Yr. Avg. 18.5%
Operating Margin 12.8%
Oper. Margin - 3 Yr. Avg. 15.1%
Pre-Tax Margin 12.9%
Pre-Tax Margin - 3 Yr. Avg. 15.3%
Net Profit Margin 9.4%
Net Profit Margin - 3 Yr. Avg. 13.7%
Effective Tax Rate 25.5%
Eff/ Tax Rate - 3 Yr. Avg. 24.8%
Payout Ratio 0%

VAR stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the VAR stock intrinsic value calculation we used $2668 million for the last fiscal year's total revenue generated by Varian Medical Systems. The default revenue input number comes from 2017 income statement of Varian Medical Systems. 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 VAR 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 VAR is calculated based on our internal credit rating of Varian Medical Systems, 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 Varian Medical Systems.
    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 VAR stock the variable cost ratio is equal to 83.4%.

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 VAR 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 5.4% for Varian Medical Systems.

Corporate tax rate of 27% is the nominal tax rate for Varian Medical Systems. 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 VAR stock is equal to 1.5%.

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 VAR are equal to 20.8%.

Life of production assets of 10 years is the average useful life of capital assets used in Varian Medical Systems 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 VAR is equal to 9.6%. 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 - $1518 million for Varian Medical Systems - 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 93 million for Varian Medical Systems 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 Varian Medical Systems at the current share price and the inputted number of shares is $10.3 billion.

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COMPANY NEWS

▶ Merger Monday Returns With A Vengeance   [Aug-06-18 03:50PM  Benzinga]
▶ [$$] With Tariff Deadline at Hand, Businesses Brace for the Fallout   [Jul-06-18 12:51AM  The Wall Street Journal]
▶ [$$] With Tariff Deadline at Hand, Businesses Brace for the Fallout   [Jul-05-18 08:07AM  The Wall Street Journal]
▶ [$$] Sirtex Medical Gets Go-Ahead From Australian Regulator for Sale   [Jul-03-18 11:46AM  The Wall Street Journal]
▶ Varian Provides Update on Proposed Sirtex Acquisition   [Jun-14-18 09:13AM  PR Newswire]
▶ Varian Medical Systems Getting Closer To Key Technical Measure   [03:00AM  Investor's Business Daily]
▶ Varian Acquires Taiwan Distributor   [08:15AM  PR Newswire]
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