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Should You Buy It: Varian's a Buy

David Peltier

05/08/08 - 08:32 AM EDT
Shares of Varian (VARI Quote - Cramer on VARI - Stock Picks) have recently tested investors patience. (Editor's note: this stock is not to be confused with Varian Medical Systems or Varian Semiconductor.). The company's stock has fallen 10+% since the company reported better than expected fiscal second quarter (ended March) results. The stock is down 37% lower from its October highs.

Varian makes scientific instruments such as spectroscopy systems and high-vacuum pumps that are used in chemical analysis, biomedicine and materials research. Some of Varian's larger customers include Dow Chemical (DOW Quote - Cramer on DOW - Stock Picks), Monsanto (MON Quote - Cramer on MON - Stock Picks), Pfizer (PFE Quote - Cramer on PFE - Stock Picks) and Procter & Gamble (PG Quote - Cramer on PG - Stock Picks).

The question is, should you buy it? Does Varian offer value following its recent pullback, or should investors focus elsewhere?

Back on April 23, Varian posted quarterly earnings of 71 cents a share, which was a nickel ahead of the consensus analyst estimate. Revenue grew 8% year-over-year to $248.2 million, which also was $1.5 million higher than expected.

Sales in both the life sciences and industrial divisions rose from a year ago, as did sales in every major geographic region. The company ended the quarter with a strong order backlog, as its customers continue to spend on research and development (R&D) to generate their own new products. Varian is also insulated from a slowing US economy, as roughly 70% of sales are generated outside of the U.S.

Varian's earnings could have been even higher in the quarter, though management increased spending for several new expected product launches in the upcoming quarters. As a result of these new items, management is targeting 5-7% organic revenue growth in fiscal 2008 (ending September).

Varian also has a clean balance sheet with $132 million of net cash ($4.30 a share) on the balance sheet. Management announced a $100 million share buyback program in February, and has repurchased $56.4 million worth of stock to date in fiscal 2008.

At current levels, the company is valued at 18 times expected full-year earnings of $2.73 a share. This is in-line with the compound annual earnings growth that Varian has delivered over the past three years and is a 13% discount to its average historical valuation.

With that in mind, I believe that Varian is attractive to purchase at current levels. The company's buyback program should help the stock find a floor in the near term, as its customers continue to spend on the new product line to buoy their own R&D efforts.