X-ray gains: Experts eye Varian Medical (VAR)

"A year ago, Varian was selling for $65 a share, but the Great Recession took its toll on hospital services, including radiation therapy. The stock is making a comeback, though still 30% below its highs of a year ago.

"But the latest quarterly report suggests that Varian is making a comeback. Profits increased 23% on an 8% increase in sales. And backlog orders have increased 9% in the most recent quarter to reach a record $2.1 billion.

"And while domestic sales may be slow, international business is picking up, especially in Japan, Latin America and China. Varian has 70% market share in the United States and 50% internationally.

"Demand for radiation is likely to increase, judging from the growth in cancer deaths, which is much faster than the growth in heart attacks and strokes.

"Varian still looks reasonably priced, selling at a little more than 17 times earnings. It has little debt, $554 million in cash, and plenty of cash flow from its double-digit profit margins.

"Some analysts think Varian is a takeover candidate. Management is impressed enough to have bought back more than $100 million in stock in the past year. Let's buy Varian Medical Systems.

Louis Basenese asserts, "I am bullish on the prospects for Varian and in turn, it share price, no matter what happens with healthcare reform. Here are eight reasons why ...

• Clear-cut market leader. With roughly 70% market share in the United States and 50% internationally, no other maker of radiation technology is better positioned to navigate bumps in the road. And since we're talking about big-ticket items, hospitals are much more likely to go with a company that has a proven track record of success.
• Pent-up demand. There's no denying that the recession put a crimp on hospital spending. But it's temporary. And with the economy on the mend, orders will inevitably pick up.
• Reimbursement rate-cut risks are overblown. Reimbursement rate cuts would certainly hurt demand for Varian's products from freestanding cancer clinics. But clinics only account for 10% of the company's potential customers. What's more, hospitals will be forced to purchase additional systems from Varian to handle the increased demand. In other words, the reimbursement issue will simply shift demand for Varian's equipment to a different buyer.
• Untapped international growth. Any adverse effects from reimbursement rate cuts will be more than offset by the company's growth in international markets. Sales in Japan, Latin America and China increased by double-digits this quarter.
• Cancer (sadly) isn't going away. The world's population keeps getting older -- people over the age of 55 account for 75% of cancer cases. Bottom line, demand for radiation technology is only headed higher. As the clear market leader, Varian is a shoe-in to capture the bulk of this growth.
• Shares are cheap. Even after the run-up, Varian trades at just over 17 times earnings. That represents a 15% discount to the average stock in the S&P 500 and a 34% discount to the company's five-year average P/E ratio. Management concurs that it's bargain, as it has repurchased roughly $100 million worth of shares this year.
• Rock-solid financials. Varian is sitting on $554 million in cash and a negligible debt balance of $37 million. It's also spinning off $116 million in cash each quarter, giving it complete financial flexibility to pursue growth opportunities organically or via bolt-on acquisitions.
• Takeover bait. Varian itself is a prime target as M&A activity returns to the market. It's the clear market leader in one of the only profitable segments for hospitals. It sports solid financials, promising growth in international markets and a cheap sticker price. Add it all up and suitors would be foolish not to jump at the opportunity.

"Overall, in my view, regardless of the outcome of healthcare legislation in Washington, the company's fundamentals point to plenty of appreciation ahead."

Steven Halpern's TheStockAdvisors.com offers a free daily overview of the favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.