Digital Transformation And Preventive Healthcare Will Redefine Imaging Standards

Key Takeaways

• Strong positioning in China and India, plus flexible manufacturing, could drive unexpected international revenue and margin upside beyond current expectations.
  
• Advancements in photon counting and vertical integration give Varex competitive and structural advantages, supporting higher growth, improved margins, and long-term earnings strength.
  
• Regulatory pressures, shifting demand, customer concentration, geopolitical risks, and price competition threaten margins and growth opportunities for Varex Imaging in core markets.

Catalysts

Designs, manufactures, and sells X-ray imaging components.

• While analyst consensus expects steady growth from China and international markets, the company's commentary on ongoing Chinese government initiatives to equip 15,000 county hospitals with advanced CT systems, coupled with demonstrated ability to flexibly fulfill large orders under tight timelines, suggests the potential for accelerated and outsized revenue growth from China not yet fully reflected in estimates.
  
• Analysts broadly agree that the new India manufacturing facility will improve international sales and margins, but this may understate the impact: rapid, low-cost, value-tier production could allow Varex to aggressively capture share in emerging markets, simultaneously reducing costs and enhancing pricing power, resulting in upside to both revenue growth and net margins.
  
• Varex's early leadership and deepening engagement with photon counting technology, already gaining momentum in industrial applications and soon to ramp up in medical imaging, positions the company for an inflection point in revenues and gross margins as adoption accelerates ahead of the projected 2029 target, with strong multi-year pipeline visibility.
  
• The global shift toward preventive healthcare and higher imaging utilization rates, driven by the aging population and longer life expectancies, is likely to drive sustained, above-trend growth in equipment sales and aftermarket service contracts, supporting higher recurring revenues and improved earnings visibility over the long term.
  
• Varex's vertical integration-combining ownership of detector, tube, software, and systems design, as well as global service infrastructure-creates a durable competitive advantage that should result in increasing market share, resilience to supply chain shocks, and structural gross margin expansion, all feeding directly into expanding earnings power.

Varex Imaging Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Varex Imaging compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Varex Imaging's revenue will grow by 2.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -5.1% today to 6.8% in 3 years time.
• The bullish analysts expect earnings to reach $61.1 million (and earnings per share of $1.21) by about August 2028, up from $-42.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 22.8x on those 2028 earnings, up from -7.7x today. This future PE is lower than the current PE for the US Medical Equipment industry at 29.3x.
• Analysts expect the number of shares outstanding to grow by 1.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.07%, as per the Simply Wall St company report.

Varex Imaging Future Earnings Per Share Growth

Risks

• Increasing regulatory scrutiny and changing approval standards in key markets could raise compliance costs and delay new product launches for Varex Imaging, constraining revenue growth and potentially widening gaps between new R&D spending and monetization.
  
• Ongoing geopolitical trade tensions, particularly with China (which accounted for 15 percent of recent revenues), and persistent tariff-related headwinds have led to material swings in shipments and gross margins, and despite mitigation efforts, further escalation could disrupt supply chains, increase input costs, and erode net margins.
  
• Reliance on a few key customers (notably large OEMs in the medical imaging field) exposes Varex Imaging to customer concentration risk; loss or reduction of orders from these major partners would translate directly into declines in top line revenue and operating profit.
  
• Secular trends toward preventive and non-radiation diagnostic modalities, combined with hospital and imaging center budget pressures, threaten to structurally shrink end-market demand for traditional X-ray imaging components, capping Varex Imaging's long-term addressable market and applying downward pressure to revenues.
  
• The continued rise of lower-cost Asian competitors and commoditization in core X-ray components is likely to drive sustained price competition, reducing Varex Imaging's pricing power and compressing gross margins, which could undermine future net earnings if not offset by sufficient innovation or cost reduction.

Valuation

• The assumed bullish price target for Varex Imaging is $23.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Varex Imaging's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $902.1 million, earnings will come to $61.1 million, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 12.1%.
  
• Given the current share price of $7.81, the bullish analyst price target of $23.0 is 66.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.