Varex Imaging Corp: Institutions & Insiders Are Buying

Varex Imaging Corp: Institutions & Insiders Are Buying

VREX Stock Has Attractive Valuation

The next time you walk through the body scanning machine at the airport or you have X-rays done, there’s a chance the technology was developed by Varex Imaging Corp (NASDAQ:VREX).

The company focuses on the medical segment, but it also sells its X-ray technology to the industrial and security markets. My view is that the potential for Varex Imaging Corp is massive.

The below chart shows the strong rally by Varex Imaging stock from its September low.

VREX stock declined to $10.36 in September 2020 before rallying by 160% to $27.10. The buying was supported by strong relative strength and an upward-trending moving average convergence/divergence (MACD).

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Varex Imaging stock is already up by 63% this year following the emergence of a bullish golden cross pattern in January, which was followed by an upside trade gap and a channel breakout.

The following chart indicates that VREX stock could target $35.00 (which it previously traded at in 2019), followed by resistance at $40.00.

Chart courtesy of StockCharts.com

Fundamentals to Improve as Pandemic Ends

Varex Imaging Corp delivered steady revenue growth from 2016 to a record $780.6 million in 2019. Then the COVID-19 pandemic surfaced and the company’s revenues contracted by 5.4%, which wasn’t that bad.

Fiscal YearRevenues (Millions)Growth
2016$620.1N/A
2017$698.112.6%
2018$773.410.8%
2019$780.60.9%
2020$738.3-5.4%

(Source: “Varex Imaging Corp.” MarketWatch, last accessed July 15, 2021.)

And while there are still uncertainties from the pandemic, Varex Imaging is expected to grow its revenues by 6.8% to $788.4 million this year, followed by 5.1% growth to a record $828.9 million in 2022. (Source: “Varex Imaging Corporation (VREX),” Yahoo! Finance, last accessed July 15, 2021.)

Along the way, Varex Imaging delivered earnings before interest, taxes, depreciation, and amortization (EBITDA) income. The pandemic led to the EBITDA declining by 78.7% in 2020, but I expect improvements over the next two years.

Fiscal YearEBITDA (Millions)Growth
2016$126.4N/A
2017$116.1-8.2%
2018$103.4-10.9%
2019$103.80.4%
2020$22.1-78.7%

(Source: MarketWatch, op. cit.)

On the bottom line, Varex Imaging Corp reported strong generally accepted accounting principles (GAAP) earnings-per-share (EPS) profits in 2016 and 2017 before suffering three consecutive years of declines.

Fiscal YearGAAP Diluted EPSGrowth
2016$1.82N/A
2017$1.36-25.5%
2018$0.72-47.4%
2019$0.40-43.9%
2020-$1.49-471.6%

(Source: MarketWatch, op. cit.)

But there’s optimism as the global economy pulls out from under the pandemic.

Analysts estimate that Varex Imaging will report an adjusted $0.99 per diluted share this year, up significantly from the $0.08 per diluted share in 2020. Looking ahead to 2022, the company’s adjusted profits are expected to rise to $1.24 per diluted share. (Source: Yahoo! Finance, op. cit.)

Varex Imaging Corp managed to generate positive free cash flow (FCF) from 2016 to 2019, prior to having negative FCF in 2020. I expect the company’s FCF to move back toward positive this year.

Fiscal YearFCFGrowth
2016$45.3N/A
2017$54.420.1%
2018$64.919.3%
2019$52.1-19.7%
2020-10.3-119.8%

(Source: MarketWatch, op. cit.)

An area that requires some massaging from Varex Imaging is its net debt of about $378.0 million, which was accumulated via its acquisitions. A return to positive FCF could help the company pare its debt.

Analyst Take

Varex Imaging stock has extremely strong support from institutional investors, with 271 institutions holding a major stake in the company. (Source: Yahoo! Finance, op. cit.)

Insiders have also been buying VREX stock. Over the last six months, insiders purchased a net 52,320 shares.

Moreover, Varex Imaging Corp trades at 21.8 times its 2022 EPS estimate and 1.3 times its consensus 2022 revenue estimate, which is attractive.