Varex Imaging: Leveraging X-Ray Innovation to Secure Global Cargo Flows

In an era of escalating global trade volumes and heightened security concerns, Varex Imaging Corporation (NASDAQ: VREX) is positioning itself as a pivotal player in the cargo security market. The company's advanced X-ray imaging technologies, coupled with strategic investments in manufacturing and emerging markets, are driving secular growth opportunities. This analysis examines how Varex's technological differentiation and the macro trends underpinning cargo security demand make it a compelling investment.

Technological Differentiation: The LINAC Advantage and Photon Counting Leap

Varex's core strength lies in its proprietary high-energy Linear Accelerator (LINAC) technology, which powers its cargo inspection systems. These systems, capable of scanning entire trucks and freight containers, are deployed at seaports, border crossings, and logistics hubs worldwide. Their ability to detect contraband, explosives, and illicit materials with precision has secured over $55 million in orders year-to-date in 2025, including a recent $25 million deal highlighted in Q2 results.

Beyond cargo security, Varex is pioneering photon counting technology, a breakthrough for medical CT imaging and industrial inspection. This innovation enables higher-resolution scans at lower radiation doses, with photon counting solutions projected to generate $150 million in annual revenue by 2029. While initially targeting healthcare, its applications in cargo screening—such as enhanced material discrimination—could further widen Varex's lead over competitors like Canon and Thales.

The company's manufacturing expansion in India, set to begin detector production by late 2025 and X-ray tubes by 2026, underscores its commitment to supply chain resilience. This move reduces reliance on China, where tariffs have disrupted sales, and positions Varex to serve Asia's booming cargo security market.

Secular Demand Drivers: A Perfect Storm for Growth

The global cargo security market is riding three powerful tailwinds:
1. Rising Trade Volumes: Global trade growth, particularly in Asia and the Middle East, is fueling demand for port and border infrastructure. Varex's systems are critical for screening the ~1.2 billion containers shipped annually.
2. Regulatory Stringency: Governments are tightening customs protocols to combat smuggling, counterfeiting, and terrorism. The EU's EU Customs 2025 initiative and U.S. Port Security Grant Program exemplify this trend.
3. Technological Modernization: Legacy cargo scanners, often based on older X-ray tube technology, are being replaced with advanced systems like Varex's LINAC-based solutions, which offer faster processing and lower false positives.

Financial Fortitude Amid Headwinds

Despite tariffs imposed by China—temporarily pausing ~$20 million in sales—Varex's financials remain robust. Q2 2025 revenue hit $213 million, up 3% year-over-year, with non-GAAP net earnings of $0.26 per share. A $226 million cash balance provides ample liquidity to fund R&D and the India plant. Management aims to reduce debt to $300–350 million by 2026, further de-risking the balance sheet.

Investment Considerations

• Catalysts: Photon counting commercialization (2029 target), India manufacturing ramp-up, and new cargo system orders. Historically, when Varex has exceeded earnings expectations, its stock has demonstrated a positive short-term reaction, with a 3-day win rate of 22.22% and a 30-day win rate of 55.56%, though medium-term returns have been mixed (e.g., a 10-day return of -0.49% and 30-day return of -0.18%).
  
• Risks: Tariffs, supply chain bottlenecks, and slower-than-expected adoption of photon counting.
• Valuation: At a forward P/E of ~20x (vs. 15x for peers), VREX is pricey but justified by its growth trajectory.

Conclusion: A Buy for Long-Term Security Plays

Varex Imaging is uniquely positioned to capitalize on the $5.6 billion cargo security market, which is projected to grow at 6% annually through 2030. Its differentiated technology, strategic geographic diversification, and secular demand drivers make it a standout investment in industrial X-ray imaging. While near-term tariff risks exist, the company's liquidity and execution on manufacturing localization should mitigate these challenges. Investors seeking exposure to global security infrastructure should consider Varex as a core holding in their industrial tech portfolio.