Come spring,

Varian Associates

(VAR) - Get Report

will be a throwback no longer.

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The Palo Alto, Calif., company is one of a dying breed -- the conglomerate -- but as its stock has drifted to an excruciating five-year low, it's gotten religion, 1990s-style. Varian has decided to jettison two of its three businesses, hoping to unlock unseen value.

And some investors are beginning to take a look at the company.

"It's categorically a value," says Ben Nahum of New York money management firm

David J. Greene

, which owns about 1.8 million Varian shares.

Varian is made up of three businesses: Health care systems, including products for radiation therapy for cancer sufferers; analytical instruments; and semiconductor equipment. The company is keeping the health care business and spinning off the other two divisions.

Friday the stock added 1 3/16, or 3.7%, to close at 33 7/16, well off its 52-week high of 58 3/8.

CIBC Oppenheimer

analyst Michael Bunyaner, who rates the company a hold, nevertheless sees the break-up value at 53 to 55 a share. OpCo has not done banking for the company and will drop coverage of Varian in conjunction with the breakup. Bunyaner says he has a hold on the stock simply because he's going to drop coverage. "Clearly once the companies are pure plays the 'conglomerate discount' should disappear," he says.

In fact, most of the analysts who cover the company now are conglomerate or spinoff analysts who aren't analyzing the underlying businesses. That's one of the reasons value guys like it.

"The real money to be made is if you buy it right now," says one value specialist from a New York hedge fund that has a small Varian holding but is considering buying more shares. He asked not to be identified.

"This is at a five-year low, everyone hates it, and it's going to be a coverage orphan. Sometimes where the best money is to be made is in the simplest things. You get a better multiple if it's in separate pieces."

He thinks the value is around 45 to 50 a share.

The breakup plan is proceeding apace. On Tuesday, the

Internal Revenue Service

allowed the spinoffs to go through tax-free. On Thursday, shareholders -- not a happy lot given the stock's poor performance -- approved the plan. The companies will trade when issued toward the end of March.

Varian and its stock have been killed in the horrendous cyclical downturn in the semiconductor equipment sector, hurt by oversupply. The health care and analytical instruments divisions showed improved sales and profits in 1998 and are expected to do so in 1999 as well. The company as a whole reported sales of $1.42 billion in fiscal 1998 ending September, up 6% from the year earlier excluding the sale of a division.

For the year the company overall showed net income of $73.8 million, or $2.43 a share, compared with 1997's $115.6 million, or $3.67 a share, which included a gain of $33.2 million, or $1.06 a share, on the sale of the

Thin Film Systems

unit, as well as a loss of $4 million, or 14 cents a share, from that operation. With a market capitalization of about $970 million, the company is trading at a price-to-sales ratio of 0.68; value players typically seek out companies trading at less than one times sales.

The semiconductor slump has been so dramatic and taken up so much of management's time and concentration, say value hunters, that in the most recent quarter, the health care and instrument segments reported lower profits than a year earlier. The stock also is depressed "because management lost a lot of credibility in terms of the medical equipment business," promising more top-line growth and margin improvements than it could deliver, says Nahum at David J. Greene.

"The huge negative is that the management team is really bad," says the hedge fund manager. "But that's what creates opportunity."

The bulls contend that the company, once it has released the semiconductor albatross onto the public (and that division's fortunes may yet change, since some rivals are already seeing an industrywide turnaround), will unlock enormous value. The other two divisions are both expected to turn in stronger sales and profits this fiscal year.

The medical business, to be called

Varian Medical Systems

, is the company's strongest.

General Electric

(GE) - Get Report

recently exited the business, improving Varian's ability to raise prices. Nahum says that the medical business should earn at least around $1.35 pro forma this fiscal year. Nahum expects that business's earnings to grow to around $1.50. The money manager values the medical business at around $18 a share and "probably $20 or $22." That stock will continue to trade on the NYSE under VAR.

The instruments business, to be called

Varian

, will earn 90 cents a share pro forma, estimates Nahum. He says the division ought to do north of $1 a share in fiscal 2000. With a modest price-to-earnings ratio, he values that segment at $12 to $15 a share. It will trade on the Nasdaq under VARI.

And then there will be the semiconductor division, to be named

Varian Semiconductor Equipment Associates

. The division did around $288 million in sales in fiscal 1998, down from historic highs near $500 million. The division once earned over $2 a share, but now is losing money. Nahum thinks that piece is worth $10 to $12 a share. The semiconductor company is going to be spun off with $100 million in cash and will trade on the Nasdaq under VSEA. (The other two businesses receive around $50 million in debt, but OpCo says both will still have low debt-to-equity ratios.)

Nahum says the minimum the company is worth is $40 in the near term. A company spokeswoman would not comment on the projections.

The company also is going to reap $20 million in savings, it says, from a variety of cost-cutting measures. Varian will lay off 50 to 100 workers, sell several expensive buildings in Palo Alto and dump its corporate jet. OpCo estimates that the savings will be worth 40 cents to 45 cents a share after tax, probably to be evenly spread across the businesses.

OpCo estimates that in fiscal 1999, the company's three businesses could earn about $2.50 a share, which it terms "conservative."

If the company can achieve that, shareholders will find that breaking up is easy to do.