This week, let's look at Varian Medical Systems (VAR), a company that manufacturers cancer therapy systems. The demographic of an aging population plays a major role here.
When I last talked about Varian a year ago, my earnings estimate for the 2011 fiscal year ended Sept. 30 was $3.48 per share, with a 12-month target price on the stock of $61, for an annualized capital gain of 15 percent. So how well did Varian do?
Earnings for the year came in at $3.44 per share, while the shares recently closed at $59.68. Although earnings and share price were off slightly from my forecast, last February or six months after I wrote about Varian the shares were trading at $70.80.
Here is another excellent example of where the implementation of a stop-loss order could have protected your gains, while at the same time enabling you to repurchase the shares, if you so desired, at about $53 per share in mid-July of this year, thereby creating an additional return of 12.6 percent from that point until the present.
In doing so you are not morphing into a day trader addicted to charts rather than using fundamental analysis with a long-term investment horizon. Rather you are simply modifying your position when the market has either over-priced or underpriced a company's underlying value. This is no different from what Warren Buffett has repeatedly addressed as being the key to successful investing.
So how does Varian look going forward? The company reported net earnings of 96 cents per share for the third quarter ended June 30, up 16 percent from 83 cents in the year-ago quarter. Revenues were $705 million, an increase of 9 percent over the year-ago quarter.
The company ended the third quarter with $633 million in cash and cash equivalents and $175 million of debt. In its forward looking guidance, management is forecasting an increase in 2012 revenues of 8 percent, with earnings per share up by 8 to 9 percent.
The intrinsic value of the shares, using a discounted earnings model with a growth rate of 12.58 percent and a discount rate of 15 percent is $84. The more conservative free cash flow the firm approach yields an intrinsic value of $122 per share. My earnings estimate for fiscal 2012 is $3.75 per share, with a 12-month target price on the stock of $68, for an annualized capital gain of 15 percent.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 a.m. and 3 p.m. at (941) 706-3449.