Medical Imaging Risks Will Test Margins Yet Preserve Value

Key Takeaways

• Rising healthcare cost controls, new regulations, and rapid tech shifts threaten Varex's revenue growth, margins, and long-term demand for traditional imaging products.
  
• Customer concentration and global supply chain risks increase the potential for revenue instability and pressure operating performance despite diversification efforts.
  
• Persistent margin pressure, sluggish growth, and competitive threats highlight vulnerability to revenue stagnation, cost challenges, and uncertainty in new technology adoption.

Catalysts

Designs, manufactures, and sells X-ray imaging components.

• While the aging global population and increasing prevalence of chronic diseases suggest sustained long-term demand for advanced imaging, Varex faces persistent challenges from value-based care initiatives and global healthcare cost containment efforts. These trends could ultimately limit capital expenditures on new imaging equipment, capping future revenue growth.
  
• Despite Varex's ongoing investment and innovation in digital detector technologies, rising concerns over data privacy and stricter regulatory requirements are likely to push compliance costs higher over time, constraining margin expansion and weighing on net earnings.
  
• While expansion into industrial imaging and security markets should diversify revenue streams, the company remains exposed to rapid technological advancements in alternative diagnostic technologies, such as AI-driven image analysis, MRI, or non-ionizing modalities. This could reduce long-term demand for traditional x-ray components and erode market share, which would pressure both revenue and profit margins.
  
• Although Varex's OEM partnerships and growing supply agreements offer potential for recurring revenues, customer concentration risks-particularly with key partners like GE Healthcare and Siemens-raise the risk of sudden material revenue declines if major contracts are lost or not renewed, directly impacting absolute revenue and earnings visibility.
  
• While global healthcare infrastructure investment, especially in emerging markets, should support sustainable unit growth, ongoing global economic uncertainty and potential de-globalization threaten supply chain resilience, manufacturing costs, and international market access. These factors could disrupt cost structures and weigh on future operating margins.

Varex Imaging Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Varex Imaging compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Varex Imaging's revenue will grow by 3.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -9.6% today to 10.6% in 3 years time.
• The bearish analysts expect earnings to reach $100.7 million (and earnings per share of $2.36) by about May 2029, up from -$82.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $173.9 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.1x on those 2029 earnings, up from -4.9x today. This future PE is lower than the current PE for the US Medical Equipment industry at 23.4x.
• The bearish analysts expect the number of shares outstanding to grow by 1.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.39%, as per the Simply Wall St company report.

Risks

• The Medical segment experienced a 4 percent year-over-year revenue decline and the Industrial segment grew by only 1 percent, raising concerns that future top line growth could remain subdued due to stagnant hospital capital expenditure and uneven demand in key end markets, negatively affecting revenue growth.
  
• Tariff impacts and ongoing trade tensions continue to pressure gross margins, as evidenced by management's admission that tariff-related costs are only partially being mitigated despite passing some increases to customers; the inability to fully offset these added expenses may compress operating margins and reduce earnings over time.
  
• Varex is facing increasing price competition, particularly in value-tier radiographic components where low-cost Asian rivals are prominent, prompting efforts to establish low-cost manufacturing in India; failure to achieve cost advantages or maintain market share could lead to further margin erosion and lost revenues.
  
• The company recorded a non-cash goodwill impairment charge of 94 million dollars due to a decline in its market capitalization, resulting in a GAAP net loss of 89 million dollars for the quarter; this highlights potential concerns about future earnings power and the risk of deteriorating investor confidence.
  
• Momentum in photon counting detector revenues, especially in the Medical segment, depends on a limited number of large OEM customers reaching commercialization, and the multi-year timelines before revenue contributions ramp expose Varex to the risk of delays, slow adoption, or customer concentration issues, which could constrain revenue growth or create earnings volatility.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Varex Imaging is $16.0, which represents up to two standard deviations below the consensus price target of $18.4. This valuation is based on what can be assumed as the expectations of Varex Imaging's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $22.0, and the most bearish reporting a price target of just $16.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $948.7 million, earnings will come to $100.7 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 9.4%.
• Given the current share price of $9.71, the analyst price target of $16.0 is 39.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.