Is Varian Medical Systems, Inc. (NYSE:VAR) Undervalued After Accounting For Its Future Growth?

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Varian Medical Systems, Inc. (NYSE:VAR) is a stock well-positioned for future growth, but many investors are wondering whether its last closing price of $136.36 is based on unrealistic expectations. Below I will be talking through a basic metric which will help answer this question.

Check out our latest analysis for Varian Medical Systems

What can we expect from Varian Medical Systems in the future?

Analysts are predicting good growth prospects for Varian Medical Systems over the next couple of years. The consensus forecast from 7 analysts is buoyant with earnings per share estimated to rise from today’s level of $4.175 to $6.504 over the next three years. This results in an annual growth rate of 14%, on average, which indicates a solid future in the near term.

Is VAR’s share price justifiable by its earnings growth?

VAR is trading at quite a high price-to-earnings (PE) ratio of 32.66x. This tells us that Varian Medical Systems is overvalued compared to the US market average ratio of 18x , and undervalued based on its latest annual earnings update compared to the Medical Equipment average of 41.6x .

NYSE:VAR Price Estimation Relative to Market, June 21st 2019
NYSE:VAR Price Estimation Relative to Market, June 21st 2019

Given that VAR’s price-to-earnings of 32.66x lies below the industry average, this already indicates that the company could be potentially undervalued. But, seeing as Varian Medical Systems is perceived as a high-growth stock, we must also account for its earnings growth, which is captured in the PEG ratio. A PE ratio of 32.66x and expected year-on-year earnings growth of 14% give Varian Medical Systems a quite high PEG ratio of 2.4x. This means that, when we account for Varian Medical Systems’s growth, the stock can be viewed as overvalued , based on the fundamentals.

What this means for you:

VAR’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are VAR’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has VAR been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of VAR’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.