Tariff Pressures Will Cripple Margins But Some Upside Remains

Key Takeaways

• Trade tensions and tariffs are disrupting global revenue patterns and creating margin pressures despite steady demand and innovation investments.
  
• Heavy reliance on large OEMs and exposure to cost competition in Asia threaten revenue stability and margin resilience amid uncertain regulatory environments.
  
• Trade tensions, tariff-related cost pressures, regulatory uncertainties, and slow industrial system ramp-ups threaten Varex Imaging's margins, sales stability, and growth prospects.

Catalysts

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

• While Varex Imaging continues to benefit from the global increase in demand for diagnostic imaging, due to an aging population and a growing burden of chronic disease, escalating trade tensions-most notably the newly imposed 125% tariffs by China-are disrupting customer purchasing patterns and are likely to cause near-term international revenue volatility, which could weigh on overall revenue growth and forecast reliability.
  
• Although the company is actively pursuing operational mitigations such as localizing manufacturing and qualifying new supply chain partners to offset tariff impacts, these efforts are costly, time-consuming, and subject to regulatory, bureaucratic, and logistical delays, risking sustained downward pressure on gross margins for the foreseeable future-even as demand outside China appears stable or improving.
  
• While Varex's ongoing investments in photon counting and digital detector technologies position the company to capture longer-term margin expansion as the industry transitions to higher-value offerings, current inflationary pressures and tightening healthcare budgets globally may slow the adoption and replacement cycles of premium imaging equipment, ultimately creating risk to topline growth and potential margin compression.
  
• The company is strategically focused on growing recurring service revenue streams and expanding into emerging markets, which should provide higher-margin, resilient sales, but overreliance on a small roster of large OEM customers and increasing cost competition from Asia could limit revenue stability and erode net margins if purchasing patterns change or prices come under further pressure.
  
• Even as the industry continues to prioritize early detection and invest in advanced imaging infrastructure worldwide, the possibility of prolonged or recurring trade disputes and regulatory investigations-such as the ongoing Chinese probe into imported X-ray tubes-create uncertainty around Varex Imaging's international order book, posing ongoing risks to both earnings visibility and forward revenue growth.

Varex Imaging Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Varex Imaging compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Varex Imaging's revenue will grow by 2.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -5.1% today to 6.6% in 3 years time.
• The bearish analysts expect earnings to reach $59.0 million (and earnings per share of $1.16) by about July 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 bearish analyst cohort, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, up from -7.6x today. This future PE is lower than the current PE for the US Medical Equipment industry at 31.1x.
• 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 11.05%, as per the Simply Wall St company report.

Varex Imaging Future Earnings Per Share Growth

Risks

• Escalating global trade tensions and sustained or increasing tariffs between the United States and China are causing a significant pause in Chinese customer orders, particularly for high-value X-ray tubes, which represent a material portion of Varex Imaging's international revenue and risk steep declines in total sales and near-term earnings.
  
• Heavy exposure to costlier raw materials and components due to international tariffs (ranging from 10 percent to 145 percent on non-China sources and up to 125 percent in China), combined with the need to pass these costs to customers, may erode the company's gross margins by 150 to 200 basis points and ultimately squeeze net income if competitive pressures prevent full price passthrough.
  
• Reliance on operational mitigation strategies such as relocating manufacturing or qualifying alternative suppliers is subject to risks around execution speed, regulatory approvals, and capital expenditure requirements, potentially resulting in prolonged revenue volatility and added pressure on cash flow and profitability.
  
• Ongoing regulatory investigations in China, including MOFCOM antidumping and competitiveness reviews, create uncertainty around continued market access for X-ray tubes and expose Varex Imaging to the threat of additional duties, sanctions, or reputational damage that could further jeopardize their China revenues, which comprise as much as 15 percent of total company sales.
  
• Slow ramp-up in high-margin industrial inspection systems, with margin accretion only expected after a two-year lag due to protracted delivery, installation, and service cycles, leaves overall company margins and recurring revenue vulnerable to shortfalls in near-term demand or competition from alternative imaging technologies.

Valuation

• The assumed bearish price target for Varex Imaging is $10.0, which represents the lowest 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $896.9 million, earnings will come to $59.0 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 11.1%.
• Given the current share price of $7.69, the bearish analyst price target of $10.0 is 23.1% 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.