Accuray Executing More Consistently, Now Waiting For China To Kick In

As I have said in the past, although the share price really doesn’t reflect it, Accuray’s (ARAY) CEO has done a good job of stabilizing and turning around this business. Product quality and service delivery issues are long since resolved, margins have improved noticeably, and debt has skillfully managed. On top of that, the company has been rolling out product and software upgrades that meaningfully address competitive weaknesses and improve the value of the system to hospitals, and the company has successfully closed a long-awaited JV for the large China market.

And now… we wait. Outside of the China opportunity Accuray remains an “is what it is” business, with the company picking up only modest market share (primarily from Elekta (OTCPK:EKTAY) and old Siemens installations). Not much has really changed about the U.S. market, where Accuray is still generally a distant afterthought, and the Japanese business can’t do it all alone. I do believe these shares remain undervalued, but a lot is riding on the China opportunity, and both Elekta and Varian (VAR) are keenly focused here too, while ViewRay (VRAY) chips away a bit at the U.S. market opportunity.

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Accuray Executing More Consistently, Now Waiting For China To Kick In

A Renewed Spark At Accuray, But Follow Through Is Critical

One of the perennial challenges in investing is maintaining a healthy balance of skepticism and realism while still allowing for the possibility of upside (and avoiding poisonous cynicism), and that can be particularly challenging when you’re dealing with companies with spotty track records. Accuray (ARAY) has had moments in the past when it looked like the story was finally coming together and the company was poised to generate meaningful forward progress, but those moments were all too brief and the company has struggled to post any real growth since the merger of TomoTherapy and Accuray in 2011.

Accuray’s fiscal first quarter got things off to a good start and there are credible reasons to believe that this fiscal year could be the start of a long-awaited meaningful improvement in the company’s financials. Even modest growth expectations would support a price above $5.50 and a fair value into the high single-digits is not unreasonable, but successful execution and delivery has long proven elusive for this company and I’m not confident enough to go all-in recommending Accuray shares on a “it’s different this time … really!” thesis.

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A Renewed Spark At Accuray, But Follow Through Is Critical

Still Not Much Momentum At Accuray

Small-cap oncology system manufacturer Accuray (ARAY) reported a decent fiscal fourth quarter, but it’s hard to see much momentum in the business or any real sign that this company is becoming a more disruptive force within the radiation oncology market. Although I continue to give management high marks for improving the underlying efficiency of the business and cleaning up the balance sheet, I just don’t see signs that Accuray is really gaining on Varian (VAR) (or even Elekta (OTCPK:EKTAY)) in any meaningful way, and I don’t see anything on the horizon that would drive a sudden shift in sentiment among customers.

Valuation remains undemanding, and I still believe the acquisition of Accuray by a Chinese or Japanese company is conceivable, but med-tech stocks most often trade on the basis of revenue growth and it looks like Accuray has a long row to hoe to generate enough revenue growth to get investors excited about the shares.

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Still Not Much Momentum At Accuray

Accuray Moves Back From A Spark To A Damp Squib

Accuray’s (ARAY) consistently inconsistent performance means that I can’t honestly say I’m surprised that its fiscal third-quarter results were disappointing, but it does continue a very frustrating trend. Accuray continues to struggle to attain and maintain any momentum in the slow-growing radiation oncology market, despite solid clinical data and some attractive system performance characteristics. While the earnings-driven sell-off does take the share price back below my estimates of fair value, these shares really aren’t going to work unless and until the company can show that it can achieve operating profitability and something more than just low single-digit revenue growth.

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Accuray Moves Back From A Spark To A Damp Squib

A Spark At Accuray - Will It Catch Fire This Time?

The problem with small-cap radiation oncology company Accuray (ARAY) is not that it never has good quarters. The problem is that the company has never been able to put together a good run. With two pretty good quarters in the hopper, though, maybe the actions that management has taken over the past couple of years are starting to make a real difference in order flow and revenue conversion.

I'm still skeptical (and still a shareholder), but if management is playing it safe with guidance, there might be some actual momentum in the business now. I will explain my thinking later in this piece, but I'm now more comfortable with a valuation approach that suggests a fair value in the mid-$7s, making Accuray worth a look if you can take on the risk that this is yet another head fake in what has been a frustrating pattern of "two steps forward, 1.9 steps backward" for many years.

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A Spark At Accuray - Will It Catch Fire This Time?

Can Accuray Build Some Momentum?

Small-cap radiation oncology specialist Accuray (ARAY) has long been an exercise in patience (and/or frustration, depending on whether you’re a “glass half-full” investor), but the strength in the shares since October’s earning release (up more than 30%) has been nice to see. The biggest question, though, remains unchanged – can Accuray string together a meaningful run of good quarters, exceed guidance, and establish a reasonable basis for believing that the company can grow to be both a viable competitor to Varian (VAR) and Elekta (OTCPK:EKTAY) and a profitable company?

I remain in the camp of “disappointed optimist”; I continue to hold my small position in these shares in large part because I believe the clinical benefits of Accuray’s platform are meaningful and underappreciated. The question of whether Accuray’s management can translate those benefits into tangible profits and cash flow for shareholders remains firmly open. Valuation likewise remains very tricky – I don’t believe the shares are all that cheap if the company can’t generate more than 4% long-term annualized revenue growth, but the story changes if and when mid-to-high single-digit revenue growth becomes plausible.

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Can Accuray Build Some Momentum?

Accuray Looks Undervalued, But A Lack Of Execution Is A Longstanding Problem

Despite a growing database on the benefits of stereotactic radiosurgery (or SRS) with its CyberKnife system and significant improvements to its mainline Tomo platform, the unfortunate reality is that Accuray (NASDAQ:ARAY) has maintained its reputation as a company that comes up short of its guidance. Although management will hit its 5% gross order growth target for this year, fiscal 2017 will go down as another year where the company underperformed relative to management's initial expectations for the year. 

That's a sour way to begin an article, but the reality is that Accuray shares are down about 10% or so from the time of my last update, and the company continues to struggle to execute and to drive wider adoption of its core radiation oncology platforms. I do believe fair value is close to $6, and that there is considerable upside potential if management can leverage the advantages of its platforms into real sales, but I have been involved in this story for a long time, and it is getting harder to believe that “if” will become a “when”.

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Accuray Looks Undervalued, But A Lack Of Execution Is A Longstanding Problem

Accuray Running Low On Chances

As the calendar is about to turn to a new year, not a lot has changed for Accuray (NASDAQ:ARAY) and that's a bad thing. This past year was supposed to be a big one for the company, but it really didn't live up to expectations. Management deserves some credit for improving the cost structure, the go-to-market strategy, and resolving some of its liquidity and dilution issues.

The challenges in front of Accuray remain the same. Can the company's high-quality CyberKnife system drive adoption of stereotactic radiation therapy? Can the company's much-improved image-guided platform drive meaningful share gain in single-vault centers? Simply put, can Accuray emerge as a meaningful player in the radiation therapy landscape alongside Varian (NYSE:VAR) and Elekta (OTCPK:EKTAY)? The current valuation says "no", which aggressive and bullish investors may regard as an ongoing opportunity for the shares.

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Accuray Running Low On Chances

Accuray Still Not Delivering Acceleration

Fiscal 2016 was supposed to be the year that Accuray (NASDAQ:ARAY) addressed the doubts that have shadowed the stock for so long - that it was too small and too far behind Varian (NYSE:VAR) and Elekta (OTCPK:EKTAY), that its technology is fundamentally inferior, that radiation oncology centers/administrators don't like/trust it, and that the company is stuck in a perpetual grey zone of inadequate growth and profitability.

Unfortunately, those doubts and concerns are largely still in place, and it is well worth asking whether Accuray can ever generate the growth that med-tech investors want from smaller companies. While there are definite positives in this business (a record backlog, new launches, improving scores in user surveys), there is no such thing as a "must own" stock and investors who think these shares are too much trouble won't get much argument from me at this point.

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Accuray Still Not Delivering Acceleration

Seeking Alpha: Accuray Still Stuck In Med-Tech's Twilight Zone

What do you do with a company that isn't growing anywhere near fast enough to be a growth stock, doesn't have the margins or cash flow to be a value stock, but has enough innovation and market potential to still be a disruptive factor in the industry? Unfortunately for Accuray's (NASDAQ:ARAY) shareholders, while the company has definitely been making progress, the pace of that progress keeps it stuck in an underwhelming valuation range, and there are still considerable doubts about whether it can take the sizable step forward it needs to be a long-term viable third player in its market.

I continue to approach Accuray with what I consider to be optimistic skepticism. I think the company has good technology and has really been focusing on addressing the past and current deficiencies of its systems. That said, this is a slow-growing market with a huge entrenched competitor and it is far from clear whether Accuray can establish a big enough market share footprint to drive the margins it needs to create long-term shareholder value. I think a fair value around $7.50 to $8.50 is fair today, with underlying upside if the company can demonstrate its ability to get and hold a double-digit market share before 2020.

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Accuray Still Stuck In Med-Tech's Twilight Zone

Seeking Alpha: Varian Medical Needs Room To Grow

While being successful enough to dominate your market is normally a good thing, it does create some valid questions about how Varian (NYSE:VAR) will continue to generate impressive FCF growth when it already has about 60% share of a market that is expected to grow less than 5% a year in the future. Faster-growing emerging markets like China can help, as can the growth of emerging product categories like proton beam therapy, but strong market share, good margins, and reimbursement pressure do create some concerns.

Varian's shares look slightly undervalued to me today and that's not a common experience in the many years I've followed the stock. While I own the much riskier and more undervalued Accuray (NASDAQ:ARAY), I'm not quite as keen on Varian as I don't think the 5% to 10% upside is sufficient reward for the risks of a further slowing of the radiotherapy market and a Wall Street overreaction to that slowdown.

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Varian Medical Needs Room To Grow

Seeking Alpha: Elekta Looking To Get Back On Track

The radiotherapy space has long been a duopoly, but it would seem as though Elekta (OTCPK:EKTAY) is doing all it can to create opportunities for Varian (NYSE:VAR), Accuray (NASDAQ:ARAY), and other players to chip away at its roughly 30% market share. From overly aggressive sales practices to over-reliance on the Gamma Knife, to serious volatility in reported results, not much has gone right over the last three years or so.

On the positive side, Elekta has had a lot of problems but still has that 30% market share and isn't seriously threatened by Accuray at present. What's more, the Atlantic MRI linac combo device could be a big step forward and an opportunity to dominate a market that could be worth about half the company's trailing revenue base. On the negative side, both Varian and Accuray have been picking away at the business, the company has no near-term leverage to the proton beam market, and a lot of credibility and investor goodwill has been chewed up by the company's struggles.

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Elekta Looking To Get Back On Track

Seeking Alpha: Slow Progress Not Enough To Convince Accuray Skeptics

It's bad enough that this is a risk-averse market that is quick to punt on any small-cap company that doesn't post near-perfect results, but Accuray's (NASDAQ:ARAY) own slow pace of progress makes it harder to aggressively defend the company and argue that investors need to reconsider these shares.

I continue to believe that Accuray is undervalued on the basis of its long-term potential, but I don't think there has been enough progress in the company's sales/marketing efforts or order growth to argue that a long-term revenue growth rate roughly double the linac market growth rate is "conservative." What's more, future performance is hardly guaranteed when you consider that the company's two chief rivals outspend the company on R&D by roughly 4x and 2x.

Despite that bleak summary, I'm hanging on. I believe Accuray is making progress and I think the company has more of a future in radiotherapy than today's price reflects.

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Slow Progress Not Enough To Convince Accuray Skeptics

Seeking Alpha: Steady, Albeit Not Spectacular, Progress At Accuray

Patience may be a moral virtue, but it's not a particularly compelling investment thesis. To that end, Accuray (NASDAQ:ARAY) is most definitely making progress from an operational standpoint, and is operationally outperforming its much larger rivals Varian (NYSE:VAR) and Elekta (OTCPK:EKTAY), but the pace of the progress is likely stifling the enthusiasm of would-be new investors.

I continue to hold Accuray as a small position in my portfolio because I think the company has turned the corner and remains meaningfully undervalued. Not only has the company improved its Tomo platform to a point where it is a legitimate standalone option, but the company's CyberKnife system is well positioned to take advantage of growing adoption of stereotactic radiosurgery and stereotactic body radiation therapy. With a fair value range of $9 to $12, there is still meaningful upside if, or when, investors become more comfortable that the company is establishing a more consistent pace of order and revenue growth and a credible road to profits and free cash flow.

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Steady, Albeit Not Spectacular, Progress At Accuray

Seeking Alpha: The Next 12 Quarters Should Say A Lot About Accuray

I don't typically like to talk about companies in "make or break" terms, but the next four quarters may be Accuray's (NASDAQ:ARAY) last, best hope for establishing itself as a legitimate growth story in radiation oncology. The company now has a fully-fledged product line-up and the marketing resources to get its name in front of radonc centers. Factoring in a (relatively) new trade-in program and the prospect for significant system renewals, the company really needs to hit its mark with quarterly orders to make a compelling case that it is a viable third player against Varian (NYSE:VAR) and Elekta (OTCPK:EKTAY).

Moving the model out a year boosts my DCF-based fair value estimate a bit above $9 while my revenue-based fair value stays around $12. That's meaningful undervaluation, but this is a company with an uninspiring record when it comes to disrupting the market and generating consistent order growth. I do believe that Accuray now offers reliable, capable, and differentiated systems that are appropriate for both multi-vault academic centers and smaller single/dual-vault community hospitals, but the next twelve months are a key proving ground for the company's sales effort and marketing message.

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The Next 12 Quarters Should Say A Lot About Accuray

Seeking Alpha: Accuray On Its Way To Being A "Why Bother?" Stock

Small-cap radiation oncology equipment company Accuray (NASDAQ:ARAY) continues to give investors more than enough reasons to strike it from their lists and move on. I believe that the clinical evidence continues to support stereotactic body radiation as a very effective method of treating certain difficult cancers and that Accuray's CyberKnife is a very good SBRT system. I also believe that Accuray need only establish a mid-teens market share in the radiation oncology market with its specialized Tomo and CyberKnife systems for the stock to do well.

The problem is that Accuray just isn't on a clear path to growth at this point. While the financial results in the third quarter weren't awful, another sizable miss with orders puts near-term revenue growth at risk and reignites concerns as to whether Accuray really can keep its foot in the door with radiation oncologists. These shares are still priced to potentially produce above-average returns, but the inability to establish a firm, sustained trajectory of orders is a major worry and sufficient cause, at least in my mind, to consider moving on to other ideas.

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Accuray On Its Way To Being A "Why Bother?" Stock

Seeking Alpha: Progress From Accuray, But Still No Big Turn

It's not hard to understand why investors could be bearish (or at least ambivalent) about Accuray (NASDAQ:ARAY). This company is well behind Varian (NYSE:VAR) in terms of market share and Varian has the financial wherewithal to spend on R&D in one quarter what Accuray spends in a year. What's more, there are still questions about whether Accuray can/will get an important product enhancement to market on time and just how much benefit the company can expect to see in terms of orders, revenues, and profits.

Although I believe I understand the bear arguments, I'm not bearish on these shares and I still see reason to own them. Yes, Accuray has a steep hill to climb to get radiation oncologists to view it, and its systems, as a true peer to Varian and Elekta (OTCPK:EKTAY). But, I believe there are advantages to Accuray's technology and products and I believe that management has made meaningful strides in improving its product quality and its marketing approach. All of that being said, orders have to materialize for Accuray's potential to be anything more than just words and figures on paper.

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Progress From Accuray, But Still No Big Turn

Seeking Alpha: Can 'Blocking And Tackling' Lead Accuray Higher?

The good news at Accuray (NASDAQ:ARAY) is that management has established a good track record for doing what they say they are going to do - the service operations are running much better, the multileaf collimator (or MLC) is on track, and the company's efforts to improve its sales strategy appear to be translating into orders. The only "but" is that none of this is all that flashy and the Street has a habit of getting bored with stories like this. I do think there is some upside to orders in CY 2015 if the MLC is released on schedule, but this remains an execution story driven by blocking and tackling and one where the realization of value could still take some time.

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Can 'Blocking And Tackling' Lead Accuray Higher?

Seeking Alpha: For Accuray, Lumpy Progress Is Still Progress

What Accuray (ARAY) is attempting to do is not easy, and that at least partially explains why the company continues to see lumpy progress on its path toward becoming a fully-fledged growth med-tech. It's hard enough to sell hospital capital equipment with a list price above $4 million, and harder still when competing against such well-established rivals as Varian (VAR) and Elekta (OTCPK:EKTAY) (rivals that were able to essentially push Siemens out of the market).

Making matters worse, Accuray's stock has gotten caught up in the same capital flight that has led to other growth med-techs like Novadaq, Heartware, and Insulet seeing share price declines between 15% and 25% over the past three months. The next 18 months are likely to continue to show quarter-to-quarter volatility in certain areas (like orders), but the shares remain too cheap so long as revenue and margins continue to develop favorably.

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For Accuray, Lumpy Progress Is Still Progress

Seeking Alpha: Accuray Now Solidly On The Right Path

After a few quarters of "are they or aren't they?" uncertainty about Accuray's (ARAY) turnaround, I think this quarter was a significant step forward for the company. Product revenue and orders have both recovered to pre-merger levels and attitudes regarding the systems appear to have turned solidly to the positive. Valuation is becoming a trickier issue now and although the shares are not all that cheap anymore from a cash flow standpoint, the shares could still do well by the looser standards of med-tech investors.

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Accuray Now Solidly On The Right Path