India Expansion And Advanced Imaging Capabilities Will Open Future Markets

Key Takeaways

• Expansion into cost-competitive manufacturing, high-value technologies, and new global markets is set to drive revenue growth and margin improvement.
  
• Increasing high-margin service/software offerings and diversification into non-medical sectors will improve recurring revenues and earnings stability.
  
• Revenue and earnings face ongoing risks from regulatory volatility, weak medical and regional markets, margin pressures, and a sizable goodwill impairment indicating uncertain long-term stability.

Catalysts

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

• Expansion into India for manufacturing radiographic detectors and components positions Varex Imaging to offer more cost-competitive products globally and capture additional share, particularly in value-tier and emerging markets, which is likely to accelerate top line revenue growth and improve long-term margins.
  
• Photon counting technology is progressing with multiple OEMs in both the Industrial and Medical segments; management projects significant step-function revenue increases (~$150 million by 2029), suggesting future expansion in higher-value, innovation-driven segments with strong pricing power, supporting long-term revenue and margin expansion.
  
• The global push for more advanced diagnostic imaging, especially driven by government initiatives (such as the expansion of CT imaging in rural China and security screening infrastructure worldwide), continues to fuel sustainable and recurring demand, providing a multi-year runway for revenue growth and earnings stability.
  
• Ongoing investments in vertical integration and expansion of high-margin service and software offerings (particularly in Industrial) are expected to drive scale, create more predictable recurring revenue streams, and gradually enhance net margins as the installed base grows and moves out of warranty.
  
• Diversification into emerging and non-medical high-growth sectors (like cargo/security inspection systems), supported by a strong pipeline and recent multi-million dollar order wins, creates new avenues for revenue growth and operational leverage, reducing reliance on traditional medical imaging cycles and contributing to long-term earnings resilience.

Varex Imaging Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Varex Imaging's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -7.9% today to 15.1% in 3 years time.
• Analysts expect earnings to reach $142.4 million (and earnings per share of $3.36) by about April 2029, up from -$67.7 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 7.4x on those 2029 earnings, up from -6.8x today. This future PE is lower than the current PE for the US Medical Equipment industry at 26.3x.
• Analysts expect the number of shares outstanding to grow by 0.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.76%, as per the Simply Wall St company report.

Risks

• Increasing regulatory and tariff-related uncertainties, particularly in China and other key global markets, could create persistent gross margin headwinds and introduce volatility in revenue, as mitigation strategies are still in process and only partially effective in the near
• to medium-term.
  
• Ongoing declines in the Medical segment (down 4% year-over-year) and regional market softness (notably APAC down 8%, EMEA down 2% year-over-year), coupled with an uncertain outlook for hospital capital expenditure, suggest longer-term challenges to stable top-line growth and may result in flat or declining revenues if not reversed.
  
• The company reported an unusually high goodwill impairment charge ($94 million, due to a decline in market capitalization), signaling potential long-term concerns regarding the company's ability to generate sufficient returns on acquired assets and raising questions about future earnings stability.
  
• Gross margin pressure from lower-margin Industrial systems shipments and higher initial hardware sales, along with deferred service revenue (higher margin service contracts trailing hardware installs by 18-24 months), may continue to compress net margins and earnings until the service base builds.
  
• China represents 15% of total revenues and remains subject to geopolitical, regulatory, and tariff risks; any renewed escalation in trade barriers, supply chain disruptions, or changes in Chinese healthcare policy could quickly erode revenue and earnings, given this regional concentration.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $18.4 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 $22.0, and the most bearish reporting a price target of just $16.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $941.9 million, earnings will come to $142.4 million, and it would be trading on a PE ratio of 7.4x, assuming you use a discount rate of 9.8%.
• Given the current share price of $10.96, the analyst price target of $18.4 is 40.4% 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.