Varian, Inc. [NDQ:VARI] - April 25, 2009: $28.25
52-week range: $19.83 (Mar. 9, 2009) - $57.25 (Jun. 5, 2008)
Varian generates about 83% of sales from their Scientific Instruments division with its Vacuum Technologies unit accounting for the rest. The scientific instruments include Mass Spectrometers, NMR Systems and other products used to analyze liquids, gasses and solids. Their Vacuum Technology unit sells and maintains products used for measuring and testing vacuum environments in industries needing ultra-clean workspaces. About two thirds of total sales come from non-US customers.
VARI was spun-off from Varian Associates on April 15, 1999 and has shown enviable growth since then. FYs 2007 and 2008 each set all-time records for sales and earnings. FYs end on September 30th.
Q1 (ended December 31) showed a down year-over-year comparison and the shares tanked - eventually bottoming at a 10-year low of $19.83/share on March 9 this year. While the March quarter is also likely to have been somewhat below 2008’s comps the consensus estimate for the full FY 2009 is now flattish at $2.20 versus $2.21.
Why be interested in Varian now? Valuation. These shares have generally traded at 20 – 30 multiples over the past 10 years. At today’s quote of $28.25 they’re now offered at < 12.9x this year’s and < 11.2x Zacks FY 2010 estimate of $2.53/share.
Here are Varian’s per share numbers as reported by Value Line:
FY .….. Sales …... C/F ….. EPS ….... B/V .... Avg. P/E ... Yearly Range
2003 …24.80 …. 2.27 …. 1.45 ….. 13.39 ….. 21.4x …...26.10 – 42.10
2004 …26.29 …. 2.50 …. 1.73 ….. 15.13 ….. 23.0x ..….31.90 – 46.50
2005 …24.92 …. 2.35 …. 1.36 ….. 16.11 ….. 27.9x ..….32.70 – 43.30
2006 …27.04 …. 2.51 …. 1.59 ….. 17.88 ….. 26.0x …...37.30 – 49.50
2007 …30.34 …. 3.06 …. 2.05 ….. 20.37 ….. 26.3x ..….43.70 – 78.30
2008 …35.01 …. 3.31 …. 2.21 ….. 20.32 ….. 25.0x …...27.30 – 68.70
The apparent decline in FY 2005 EPS was the result of the sale of a division that had generated $0.41 of the $1.73 EPS in FY 2004.
Value Line is assuming a 23 multiple for their 3 – 5 year projections. Morningstar rates Varian at 4 Stars (5 Stars being best) and assigns Varian a ‘fair value’ of $45/share.
I’m figuring on an even more conservative basis. If Varian hits the $2.20 estimate and comes back to a 14 multiple we’ll see the shares at $30.80 before year-end. That target price is lower than the absolute lowest share price touched in the whole four-year period 2004 -2007.
Varian had almost $117 million in cash at year-end 2008 versus total debt of just $18.8 million. Debt is just 5% of total capitalization. They have been steadily retiring shares since 2004. The outstanding shares have come down from 34.84 million to about 29 million currently.
Here’s a nice combination play with Varian that can generate outstanding returns even if the shares rise only slightly:
………………………………........................……. Cash Outlay …………… Cash Inflow
Buy 1000 VARI @$28.25 …...............………..$28,250
Sell 10 Nov. $30 calls @$3.40 …………..................………………………. $3,400
Sell 10 Nov. $30 puts @$5.30 ……………................…………………….. $5,300
Net Cash Out-of-Pocket ……….............……..$19,550
If Varian shares have risen to at least $30 (+ 6.2%) by November 20th:
Your $30 calls will be exercised.
You will sell your shares for $30,000.
Your $30 puts will expire worthless.
You will have no further option obligations.
You will hold no shares and $30,000 cash for your original
outlay of $19,550.
That’s a best-case scenario profit of $10,450/$19,550 or
plus 53% cash-on-cash return.
That would have been achieved in less than 7 months on shares that only needed to go up by 6.2% from trade inception.
What’s the risk?
If Varian is still below $30 on November 20th:
Your $30 calls will expire worthless.
Your $30 puts will be exercised.
You will be forced to buy another 1000 shares and to lay out
an additional $30,000 cash.
You will then own 2000 shares of VARI.
What’s the break-even on this whole trade?
On the first 1000 shares it’s their purchase price of $28.25 less
the $3.40 /share call premium = $24.85 /share.
On the ‘put’ shares it’s the $30 strike price less the
$5.30 /share option premium = $24.70 /share.
Your break-even point is the average of those = $24.78 /share.
Varian shares could drop by up to $3.47 or (-12.2%) without you
suffering a loss on the trade.
Disclosure: Author is long Varian shares and short Varian options.
52-week range: $19.83 (Mar. 9, 2009) - $57.25 (Jun. 5, 2008)
Varian generates about 83% of sales from their Scientific Instruments division with its Vacuum Technologies unit accounting for the rest. The scientific instruments include Mass Spectrometers, NMR Systems and other products used to analyze liquids, gasses and solids. Their Vacuum Technology unit sells and maintains products used for measuring and testing vacuum environments in industries needing ultra-clean workspaces. About two thirds of total sales come from non-US customers.
VARI was spun-off from Varian Associates on April 15, 1999 and has shown enviable growth since then. FYs 2007 and 2008 each set all-time records for sales and earnings. FYs end on September 30th.
Q1 (ended December 31) showed a down year-over-year comparison and the shares tanked - eventually bottoming at a 10-year low of $19.83/share on March 9 this year. While the March quarter is also likely to have been somewhat below 2008’s comps the consensus estimate for the full FY 2009 is now flattish at $2.20 versus $2.21.
Why be interested in Varian now? Valuation. These shares have generally traded at 20 – 30 multiples over the past 10 years. At today’s quote of $28.25 they’re now offered at < 12.9x this year’s and < 11.2x Zacks FY 2010 estimate of $2.53/share.
Here are Varian’s per share numbers as reported by Value Line:
FY .….. Sales …... C/F ….. EPS ….... B/V .... Avg. P/E ... Yearly Range
2003 …24.80 …. 2.27 …. 1.45 ….. 13.39 ….. 21.4x …...26.10 – 42.10
2004 …26.29 …. 2.50 …. 1.73 ….. 15.13 ….. 23.0x ..….31.90 – 46.50
2005 …24.92 …. 2.35 …. 1.36 ….. 16.11 ….. 27.9x ..….32.70 – 43.30
2006 …27.04 …. 2.51 …. 1.59 ….. 17.88 ….. 26.0x …...37.30 – 49.50
2007 …30.34 …. 3.06 …. 2.05 ….. 20.37 ….. 26.3x ..….43.70 – 78.30
2008 …35.01 …. 3.31 …. 2.21 ….. 20.32 ….. 25.0x …...27.30 – 68.70
The apparent decline in FY 2005 EPS was the result of the sale of a division that had generated $0.41 of the $1.73 EPS in FY 2004.
Value Line is assuming a 23 multiple for their 3 – 5 year projections. Morningstar rates Varian at 4 Stars (5 Stars being best) and assigns Varian a ‘fair value’ of $45/share.
I’m figuring on an even more conservative basis. If Varian hits the $2.20 estimate and comes back to a 14 multiple we’ll see the shares at $30.80 before year-end. That target price is lower than the absolute lowest share price touched in the whole four-year period 2004 -2007.
Varian had almost $117 million in cash at year-end 2008 versus total debt of just $18.8 million. Debt is just 5% of total capitalization. They have been steadily retiring shares since 2004. The outstanding shares have come down from 34.84 million to about 29 million currently.
Here’s a nice combination play with Varian that can generate outstanding returns even if the shares rise only slightly:
………………………………........................……. Cash Outlay …………… Cash Inflow
Buy 1000 VARI @$28.25 …...............………..$28,250
Sell 10 Nov. $30 calls @$3.40 …………..................………………………. $3,400
Sell 10 Nov. $30 puts @$5.30 ……………................…………………….. $5,300
Net Cash Out-of-Pocket ……….............……..$19,550
If Varian shares have risen to at least $30 (+ 6.2%) by November 20th:
Your $30 calls will be exercised.
You will sell your shares for $30,000.
Your $30 puts will expire worthless.
You will have no further option obligations.
You will hold no shares and $30,000 cash for your original
outlay of $19,550.
That’s a best-case scenario profit of $10,450/$19,550 or
plus 53% cash-on-cash return.
That would have been achieved in less than 7 months on shares that only needed to go up by 6.2% from trade inception.
What’s the risk?
If Varian is still below $30 on November 20th:
Your $30 calls will expire worthless.
Your $30 puts will be exercised.
You will be forced to buy another 1000 shares and to lay out
an additional $30,000 cash.
You will then own 2000 shares of VARI.
What’s the break-even on this whole trade?
On the first 1000 shares it’s their purchase price of $28.25 less
the $3.40 /share call premium = $24.85 /share.
On the ‘put’ shares it’s the $30 strike price less the
$5.30 /share option premium = $24.70 /share.
Your break-even point is the average of those = $24.78 /share.
Varian shares could drop by up to $3.47 or (-12.2%) without you
suffering a loss on the trade.
Disclosure: Author is long Varian shares and short Varian options.
