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 ).