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Varian Spinoff Could Boost Sluggish Topline Growth, Says Analyst

Varian Medical Systems ( VAR ) got a mostly favorable reception from Wall Street Tuesday after it announced late Monday that it’s spinning off its imaging-components business into a separate company. Varian said that it will complete the spinoff by year’s end through a tax-free distribution that will turn the imaging unit into a stand-alone company. The business is “fundamentally different” from Varian’s core business in radiation oncology, Varian CEO Dow Wilson said in a statement, so the two will be better off apart. Varian said that it will incur $35 million in charges but financial guidance for this year is otherwise unchanged. Varian’s management said the spinoff will bring $20 million in “dis-synergies” for the remaining company, mostly through increased general and administrative expenses, but that after a couple of years this should be offset by a combination of cost-cutting and service agreements between the two companies. RBC Capital Markets analyst Brandon Henry gave a thumb’s up and raised his price target on Varian stock to 88 from 85, while affirming a sector-perform rating. “Varian’s Imaging Components business has weighed on the company’s topline growth for the last five quarters,” Henry wrote in a research note, citing slowing customer demand along with competitive and pricing pressures. “However, we expect Imaging Components to return to low-single-digit year-over-year growth in fiscal year 2017.” Varian’s revenue growth has been stuck in single digits for the last four years, and in the most recent quarter was flat. Henry sees the spinoff as an opportunity for the remaining company to broaden its reach in the cancer market. “We do not expect any transformational M&A, as management likes to keep a relatively conservative balance sheet,” he wrote. “However, we expect slightly more topline growth going forward to be from tuck-in M&A than in the past.” Varian stock was up a fraction in early trading on the stock market today , near 83. The stock holds a decent IBD Composite Rating of 76, helped partly by being in the highest-ranked of all the medical groups, Systems & Equipment, which currently stands at No. 19 in IBD’s ranking of 197 industry groups. Top stocks in the group include Intuitive Surgical ( ISRG ), Masimo ( MASI ) and Cantel Medical ( CMN ).

Microsoft Stock Oversold, Gets Upgrade On Cloud Prospects

Microsoft ( MSFT ) stock is “underappreciated” by investors who are overlooking the company’s long-term prospects in cloud computing services, Cowen analyst Gregg Moskowitz said Tuesday. Moskowitz upgraded his rating on Microsoft stock to outperform from market perform, with a price target of 58. Microsoft was up over 2%, above 51, in morning trading on the stock market today . “With shares down 10% year to date on account of disappointing fiscal Q3 earnings, the market has overreacted, with an undue focus on the short term,” Moskowitz said in a research report. He sees Office 365 revenue accelerating and long-term success for Azure cloud infrastructure services. Microsoft’s Office productivity software has reached a turning point in its transition to a subscription service from licensed software, he said. Office sales returned to growth last quarter after a series of declines during the transition, Moskowitz said. Meanwhile, Azure is poised to gain higher capacity workloads from corporate customers as IT resources shift to the public cloud, he said. Cowen’s recent survey of over 300 public cloud customers gives it confidence in Microsoft’s cloud prospects, Moskowitz said. “The survey results were clearly positive for Azure, particularly at the enterprise level,” Moskowitz said. “Among those respondents who are looking to add a new public cloud service, 59% are considering Azure, which was higher than any other offering. “Further, when restricting the data to enterprise customers, Azure held a commanding 10-point advantage over the next closest vendor (53% vs. 43% for IBM ( IBM ) SoftLayer), making it the clear preference within this category of customer.” Other competitors include Alphabet ’s ( GOOGL ) Google Cloud Platform and Amazon.com ’s ( AMZN ) Amazon Web Services. RELATED: Microsoft Sheds Low-End Mobile Phone Business Microsoft Stock Rated Hold, Seen Near Full Value In Choppy Market .

Did Xilinx’s 2021 Forecast Undercut Intel’s $17 Billion Altera Buy?

Broadly, Xilinx ‘s ( XLNX ) analyst day Monday was an acknowledgement that the field programmable gate array (FPGA) industry will grow less than 10% in the long term, which could hurt the $16.7 billion bet placed last year by No. 1 chipmaker Intel ( INTC ) on FPGA-maker Altera, a William Blair analyst said Tuesday. Late Monday, stand-alone FPGA maker Xilinx reiterated its fiscal 2017 guidance for growth of 4%-8% for sales and 7%-9% for operational expenses. Through 2021, Xilinx expects $750 million in incremental opportunity, but that only represents a 6% compound annual growth rate. FPGAs are chips which customers can program “in the field,” after manufacture, according to their needs. The overall tone Monday was positive “but lacked conviction,” William Blair analyst Anil Doradla wrote Tuesday in a research report. Commentary regarding Xilinx’s bread-and-butter wireless and wireline segments was limited, leading Doradla to say demand “continues to be muted.” “We believe the company is working hard to diversify away from its traditional markets as the company’s core markets continue to face structural shifts and increasingly pose headwinds to the company,” he wrote. Asian product makers are unlikely to pay premium dollars for Xilinx’s high-end FPGAs, and the company’s aerospace and defense spending opportunities are highly exposed to volatile government funding, Doradla wrote. But he kept his outperform rating on Xilinx stock. Xilinx’s commentary Monday centered on growth opportunities within cloud computing, embedded vision, industrial Internet of Things (IoT) and 5G markets. There, Xilinx faces FPGA competition from Intel/Altera and an IoT rivalry with Nvidia ( NVDA ) graphics chips. In morning trading on the stock market today , Xilinx stock nudged up 1%, above 45. Shares have climbed incrementally on seven of the past eight trading days. But Tuesday’s rise underperformed IBD’s 41-company Electronic Semiconductor-Fabless industry group, which was up more than 2% Tuesday morning. Intel stock was up 2.5%, near 31. Xilinx Viewed As Possible Takeover Target Xilinx’s fiscal 2017 investments could lead to greater market share gains against Intel/Altera, Rosenblatt analyst Kinngai Chan wrote in a report. Xilinx sees its 28-nanometer and 20-nm market share at 65% and 80%, respectively. And Xilinx forecasts a one-year lead on Altera in the 16-nm market. This refers to the width of the circuitry etching in chips, so the smaller the manufacturing capability, the more electronics that in theory can go onto a chip. The investments should lead to “robust” growth for patient investors in 2021, MKM analyst Ian Ing says. The competitive landscape vs. Intel looks “benign,” and Xilinx’s uniquely re-configurable chips are ideal for data center acceleration, he wrote in a report. But “we do not foresee Xilinx’s investment time frames shortening from the four-five years from initial investments to material revenues,” he wrote. “Specialty FPGA chips are unique, given that they must go through two complete design and development cycles before volume.” That could drive off potential investors, he wrote, reiterating his belief that Xilinx could benefit from an acquisition by Apple ( AAPL ) suppliers such as Qualcomm ( QCOM ) or Broadcom ( AVGO ). William Blair’s Doradla noted as much — Xilinx remains the singular merchant player in the FPGA market, he said. Ing kept his neutral rating and 45 price target on Xilinx stock.