At An All-Time Low of $17, Should You Consider Buying Varex Imaging?
Varex Imaging Corporation (NASDAQ: VREX), best known for its X-ray tubes and imaging solutions, has seen its stock fall more than 40% year-to-date, primarily due to concerns over the company’s mounting debt in the current Covid-19 crisis. Varex stock also remains down by about 56% from levels seen in early 2018, a little over 2 years ago. With economies opening up gradually, there will be an increase in non-Covid patient volume and demand of X-Ray imaging systems. While the company has seen steady revenue growth over the recent years, its P/E multiple has declined compared to historical years, making it potentially attractive. However, we believe the stock could still see lower levels, given that the company has a huge debt to cater to with limited cash generated from its operations. Our dashboard, ‘What Factors Drove -56% Change In Varex Imaging Corporation Stock Between 2017 And Now?‘, has the underlying numbers.
Steady Top Line Growth But A Decline In Bottom Line
Varex’s revenue grew 11.8% from $698.1 million in 2017 to $780.6 million in 2019 (note that the company’s fiscal year ends in September), primarily due to higher sales of its X-Ray tubes for oncology application as well as for airport security. The company’s adjusted net income (as reported in the company’s SEC filings) declined 26.5% from $68.3 million to $50.2 million over the same period, driven by a 340 bps margin contraction from 9.8% to 6.4%. The decline in net margins can be attributed to higher restructuring, amortization, and other expenses. Adjusted EPS declined 27.6% over the same period to $1.30, with a modest 1.6% growth in number of shares. Despite the decline in earnings, its P/E Multiple remained around 22x in 2019, similar to levels seen in 2017. However, the multiple has contracted over 40% to 13.6x currently, as the coronavirus pandemic clouds the company’s outlook.
Why The Stock Price Could Underperform?
Given the pandemic and lockdowns imposed in several cities, people are avoiding non-essential visits to doctors, which, in turn, translates into lower demand for imaging systems for hospitals and clinics. However, with the global economies gradually opening up now, the demand for imaging systems will also increase. Though the company didn’t see much of an impact from the current pandemic on its sales for the quarter ending March 2020, it withdrew its guidance for the full year owing to the uncertainties. Beyond the sales for the company, the pessimism in Varex stock can be attributed to concerns over its high debt of $383 million while its cash in hand is a mere $24 million. The company generated $71 million in cash from operations in 2019, and its interest expense stood at $21 million. Though it appears that the company will likely manage its interest commitments in the near term, it has recently decided to raise additional capital of $65 million, adding to the overall interest commitments. Stocks of companies that are highly leveraged usually do not perform well in a time of crisis, as investors look for safety.
These are extraordinary times for businesses and the question really is, despite the expected headwinds, is Varex stock a good buy after such a decline? The 56% decline in the stock price since 2017 is largely driven by the P/E Multiple contraction from 22.3x to 13.6x, reflecting a 39% decline. While the current multiple is lower when compared to its historical levels, we believe that the stock could remain rangebound around the current levels in the near term. Firstly, its high level of debt remains a concern in the near term. Secondly, going by the consensus EPS estimate of $1.07 for Varex in FY 2021 (fiscal ending Sep 2021), and a P/E multiple of 16x (20% higher than the current levels), it translates into a price of $17, which is roughly the price the stock is currently trading at.
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