Expanding Operations In China And India Will Open New Opportunities In Medical And Industrial Markets

Key Takeaways

• Improved demand in China and expansion into cargo inspection are driving growth in Medical and Industrial segments.
  
• Strategic investments and production in India enhance future revenue and operational efficiency, supporting long-term scalability.
  
• Heavy reliance on China and new project investments could pressure margins, while supply chain issues and high costs further challenge future earnings.

Catalysts

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

• Varex is seeing improving demand trends and customer orders, particularly a rebound in China, which should drive revenue growth in both the Medical and Industrial segments.
  
• The company has expanded its offerings in cargo and security inspection, with a growing opportunity in high-energy cargo inspection systems and related services expected to contribute significantly to future revenue and profitability.
  
• The stabilization and potential recovery in the semiconductor, electronics, and battery inspection verticals represent a forward-looking growth opportunity that could positively impact future revenue.
  
• The planned start of radiographic component production in India is expected to support international sales growth and operational efficiency, potentially enhancing net margins.
  
• With a strong cash position and ongoing strategic investments in R&D, Varex is well-positioned to capitalize on long-term growth opportunities, which could result in improved earnings scalability as these investments yield results.

Varex Imaging Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Varex Imaging's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.8% today to 9.5% in 3 years time.
• Analysts expect earnings to reach $85.3 million (and earnings per share of $2.06) by about April 2028, up from $-47.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, up from -9.9x today. This future PE is lower than the current PE for the US Medical Equipment industry at 27.6x.
• Analysts expect the number of shares outstanding to grow by 0.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.31%, as per the Simply Wall St company report.

Varex Imaging Future Earnings Per Share Growth

Risks

• The reliance on China for a significant portion of revenue poses a risk, as geopolitical tensions and tariffs could lead to increased costs or reduced sales, impacting future revenues and profit margins.
  
• The company's investments in new projects like the India plant and the cargo and vehicle inspection systems are currently margin-decreting and could strain financials if these ventures do not achieve expected revenue levels, affecting net margins and earnings.
  
• The uncertainty in global supply chains, including labor challenges noted during the holiday season, has already impacted the ability to fulfill demand, which might continue to affect future quarterly revenues and cash flow.
  
• The cargo and vehicle inspection business faces long order turnaround times and initial lower margins until service revenues begin, posing a risk to near-term earnings and operating margins.
  
• A high tax rate and increased spending in areas like R&D and SG&A could pressure net earnings if revenue growth does not keep pace with these higher costs.

Valuation

• The analysts have a consensus price target of $21.2 for Varex Imaging based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $26.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $900.4 million, earnings will come to $85.3 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 9.3%.
• Given the current share price of $11.43, the analyst price target of $21.2 is 46.1% 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.