Jefferies' price target reduction comes as the company "navigates a rough patch."
Some of Varian Medical's issues seem transitory, but pressure on margins will remain a theme in fiscal 2016, Jefferies said.
"The stagnant margin forecast for F16 will mark the fifth consecutive year of either a flat or declining profitability profile, suggesting the company continues to struggle with several structural issues including X-ray in-sourcing ($50mm in annual revenue), low margin proton revenue mix, and oncology ASP erosion from emerging market mix," Jefferies said.
Additionally, the Palo Alto-based medical device manufacturer lowered its guidance for its fiscal 2015 earnings and unveiled a new treatment delivery system last week.
Varian Medical issued preliminary fiscal 2015 guidance with earnings of $4.29 per share versus its previous guidance of $4.36 to $4.41 per share.
The company will report its fourth quarter earnings after the market close on Wednesday.
Shares of Varian Medical Systems closed down by 1.12% to $76.17 on Tuesday.
Separately, TheStreet Ratings team rates VARIAN MEDICAL SYSTEMS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
We rate VARIAN MEDICAL SYSTEMS INC (VAR) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its increase in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels and good cash flow from operations. We feel its strengths outweigh the fact that the company has had lackluster performance in the stock itself.
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Health Care Equipment & Supplies industry. The net income increased by 6.0% when compared to the same quarter one year prior, going from $107.09 million to $113.51 million.
- The revenue growth significantly trails the industry average of 35.9%. Since the same quarter one year prior, revenues slightly increased by 4.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
- VAR's debt-to-equity ratio is very low at 0.29 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.32, which illustrates the ability to avoid short-term cash problems.
- Net operating cash flow has significantly increased by 112.66% to $183.90 million when compared to the same quarter last year. In addition, VARIAN MEDICAL SYSTEMS INC has also vastly surpassed the industry average cash flow growth rate of -31.77%.
- You can view the full analysis from the report here: VAR