Photon Counting Technology And India Expansion Will Improve Future Prospects In X-ray Imaging

Key Takeaways

• Innovation in product portfolios and photon counting technology could drive revenue growth and improve margins with high-value, next-gen CT integrations.
  
• Expanding manufacturing in India may reduce costs and increase competitive radiographic component sales, enhancing margins and supply chain efficiency.
  
• Continued inventory destocking and regional declines pose short-term revenue challenges, while unfavorable sales mix and tariff risks could pressure margins and earnings.

Catalysts

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

• Stabilization of customer inventory levels in the Medical segment is expected to subside by Q2 2025, which should decrease the impact of destocking and support revenue growth.
  
• Expansion and innovation in product portfolios, such as the AZURE dynamic detectors and photon counting technology, are expected to drive future revenue growth and possibly improve net margins due to higher-margin services.
  
• Progress in photon counting technology adoption could be a significant revenue growth driver by integrating with next-generation CT systems, with potential to considerably boost future earnings.
  
• The expansion of the India manufacturing facility is expected to lead to lower production costs and potentially improve net margins by optimizing the supply chain and increasing sales of competitive radiographic components.
  
• Launching new cargo inspection systems with a differentiated value proposition, particularly in tender-driven emerging markets, could contribute to revenue and margin improvement by directly selling and servicing security solutions.

Varex Imaging Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Varex Imaging's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.9% today to 6.4% in 3 years time.
• Analysts expect earnings to reach $55.3 million (and earnings per share of $1.18) by about January 2028, up from $-47.7 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 23.3x on those 2028 earnings, up from -11.6x today. This future PE is lower than the current PE for the US Medical Equipment industry at 34.7x.
• Analysts expect the number of shares outstanding to grow by 4.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Varex Imaging Future Earnings Per Share Growth

Risks

• Continued inventory destocking by customers in the Medical segment decreased Medical revenues by 12% year-over-year, impacting short-term revenue growth and potentially affecting net margins until it stabilizes.
  
• Revenue in the Industrial segment decreased 4% year-over-year due to the challenging comparison against the record revenues of the previous fiscal year, affecting earnings visibility and consistency.
  
• The China segment experienced a 20% revenue decline year-over-year, and the timing for recovery remains uncertain, impacting overall revenue contribution and risking further declines if stimulus expectations fail to materialize.
  
• Current unfavorable sales mix in the Industrial segment, with high equipment sales and lower service sales, pressures gross margins, potentially affecting net earnings if not shifted towards higher-margin services as anticipated.
  
• Potential changes to tariffs and retaliatory actions could impact the cost structure and competitiveness globally, thereby affecting revenue, net margins, and bottom-line earnings.

Valuation

• The analysts have a consensus price target of $22.2 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 $30.0, and the most bearish reporting a price target of just $16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $870.3 million, earnings will come to $55.3 million, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 8.1%.
• Given the current share price of $13.45, the analyst's price target of $22.2 is 39.4% 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.