Edwards Lifesciences Corp. (EW, Financial) and Intuitive Surgical Inc. (ISRG, Financial) are on the Wall Street radar this week.
The two companies reported first-quarter earnings on Tuesday that beat analysts' estimates.
Edwards Lifesciences reported adjusted earnings of 54 cents per share on $1.22 billion in revenue, beating analysts' average estimate of 47 cents per share and $1.16 billion in sales.
Intuitive Surgical reported adjusted earnings of $3.52 per share on $1.29 billion in revenue, beating analysts' average estimate of $2.64 per share and $1.11 billion in sales.
What drove the strong performance of the two companies? They are in the right place at the right time, with wide moats to deliver value investors superior returns.
The place is the market for medical products and devices. Edwards Lifesciences is a leading provider of artificial heart valves and hemodynamic monitoring. Intuitive Surgical is leading in robotic surgery devices.
Medical products and devices are fast-growing industries, which have helped both companies grow close to 10% over the last three years.
| Company | EW | ISRG |
| Three-year Revenue Growth (%) | 9.4 | 10.3% |
| Current Operating Margin (%) | 30.02 | 24.09 |
| Average Annual Total Return (2010-20) | 20.19 | 20.25 |
| Market Price | $89.63 | $811.11 |
| Intrinsic Value | $74.95 | $634.07 |
| Company | ROIC | WACC | ROIC-WACC (Economic profit) |
| EW | 24.75% | 8.00% | 16.75% |
| ISRG | 16.13% | 7.35% | 8.78% |
The time is now, the era of the massive aging of the baby boomer generation, a worldwide trend that began around 2005, as the first baby boomer cohorts crossed 60. Between 2000 and 2011, the U.S. population over 65 grew by 18%, a rate that is expected to continue for another two decades.
In addition, legislation like the Affordable Care Act in the U.S., which makes health insurance available to more people, is expected to increase demand for health services.
Both factors are a strong tailwind for Edwards Lifesciences and Intuitive as the elderly population is more likely to need heart valve replacements and have different surgeries performed.
Meanwhile, the products and devices of the two companies have become the standards in their respective industries, and the two companies are in lock-in relations with doctors due to extensive training required to use their products.
Simply put, both companies have wide moats to protect their offerings from competition, as confirmed by the high economic profit.
Wall Street has taken notice, helping both companies deliver close to 20% total annual return for their stockholders over the last decade.
But Wall Street may have run too far too fast for discounting the prospects of the two companies.
At around $90, Edwards Lifesciences' shares trade well above their intrinsic value of $74.95.
Intuitive Surgical's shares, currently at around $811, trade well above their intrinsic value of $634.
These valuations give investors no margin of error if the performance of the two companies misses expectations in the short term.
In the long term, demographics are favorable for the medical technology industry, and wide moats will help the two companies to continue their winning streak.
Disclosure: I own shares of Edwards Science and Intuitive Surgical.
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