Varex Imaging Corp (VREX) stock intrinsic value fair value estimate & owner earnings analysis

Varex Imaging makes the X-ray tubes, digital detectors and related parts that go inside other companies' imaging machines. It sells mostly to large equipment makers: Canon was about 18% of fiscal 2025 revenue, the five largest customers about 40% and the ten largest about 52%. It reports two segments, Medical and Industrial (uses such as non-destructive testing). Revenue was $844.6 million in fiscal 2025, up 4%, and gross margin improved to 34.4% from 31.7%. How we measure earnings. We start from operating cash flow, then remove swings in working capital, subtract stock-based pay as a real cost, and subtract only the capital spending needed to keep the plant running. Per diluted share this "owner earnings" figure was $1.64 (FY2016), $1.44, $1.33, $0.93, -$0.25, $1.43, $1.70, $1.03, $0.08 and $0.87 (FY2025). FY2016 is excluded from our reference level because it predates the January 2017 separation from Varian Medical Systems and the May 2017 purchase of PerkinElmer's medical imaging business, which together created the current business. Over FY2017 to FY2025 the figure was positive in eight of nine years; the median is $1.03. Fiscal 2023 is divided by 50.3 million diluted shares, which includes 9.6 million shares from the convertible notes (repaid in June 2025); on about 41 million shares it would be about $1.27. The nine months to July 3, 2026 came in at about $0.63 per share versus about $0.47 a year earlier, after deducting all capital spending in both periods, which points to an annual run rate of roughly $0.85. Capital spending has stepped up to $25.9 million in those nine months from $17.3 million. Weighing the historical median against that run rate, we anchor on $0.95 per share. Growth. Owner earnings rose from $0.08 to $0.87 in fiscal 2025, but that was a rebound from a very weak year, so it is not a rate we extend. We assume no growth in year one and no growth after. Revenue has grown from $620 million in fiscal 2016 to $845 million in fiscal 2025, but it is not backed by contracts or a backlog we can point to, and part of it came from the 2017 acquisition, so none is credited. Something else to know. Working capital has repeatedly absorbed cash: inventory rose by $85.0 million in fiscal 2022 and by $39.9 million in fiscal 2025 (to $299.4 million), and the nine months to July 2026 added roughly $53 million more. We remove these swings from owner earnings so that timing does not distort the picture, but if the stock does not sell through, write-downs will follow. Inventory write-downs ran between $3.8 million and $6.4 million a year in fiscal 2022 through 2025. Base case: $11.57 per share. Owner earnings of $0.95 per share hold flat for ten years, then decline 5% a year, because we can point to no contract or backlog that secures earnings beyond that point. The nine-year record of mostly positive owner earnings is what supports the first ten years. Together that is worth about $11.57. Bear case: $4.62 per share. Two named risks. First, $368 million of 7.875% senior secured notes mature in October 2027; refinancing at about 10% would add roughly $7.8 million of annual interest, about $0.18 per share. Second, in April 2025 China's Ministry of Commerce opened investigations into imported X-ray tubes; the investigations were suspended indefinitely in November 2025, but if they restart and half of the roughly 10% of revenue that is tubes shipped into China were lost, that is about $42 million of revenue at a 34% gross margin, about $0.33 per share before tax effects. Together these bring owner earnings to about $0.44 per share, declining 10% a year after year ten. The company also took a $93.9 million goodwill write-down on its Medical business in fiscal 2025, citing tariffs and those investigations. That write-down is a non-cash charge and does not reduce owner earnings; we reflect the pressure behind it (tariffs and the China investigations) in this case instead. Bull case: $18.27 per share. Owner earnings return to about $1.50 per share, a level reached or approached in four of the last nine fiscal years (FY2017 $1.44, FY2018 $1.33, FY2021 $1.43, FY2022 $1.70), then decline 5% a year after year ten. Gross margin already rose 2.7 percentage points in fiscal 2025, and nine-month revenue to July 2026 was up 3.3%. We do not subtract debt separately, because cash interest ($31.3 million in fiscal 2025) is already deducted in owner earnings. Total debt was about $369.9 million of principal at fiscal year end, almost all of it the 2027 notes; the company also had $154.8 million available on its revolving credit facility. The $200 million convertible notes were repaid in June 2025, partly funded by an add-on to the senior secured notes. What would make this wrong: a failed or expensive refinancing, loss of a large customer such as Canon, renewed Chinese action against imported tubes, or inventory that has to be written off. What the shares appear to be worth: about $11.57 in the base case, with $4.62 to $18.27 as the range. The margin-of-safety price is $5.50, and it applies only after the 2027 notes are refinanced on acceptable terms.