The GF Score system from GuruFocus is a unique metric that takes into account a company’s financial strength, profitability, growth, valuation and momentum to determine if the stock is likely to outperform. Those stocks with higher GF Scores generally produce higher returns than those with lower GF Scores, according to a backtesting study by GuruFocus.
Given the ongoing volatility in markets, I believe screening for only the highest quality of names is ideal as it offers the best chance of finding a margin of safety and avoiding financial risk. Thus, this article will examine two medical device stocks that have a GF Score of at least 98 out of 100. and trade at a discount to GF Value.
Abiomed
The first name for consideration is Abiomed Inc. (ABMD, Financial), which provides support devices and continuing care products for heart failure patients. The company’s portfolio of products helps increase blood flow to coronary arteries and organs that allow for the heart to rest, recover and heal. The company has a market capitalization of $12.2 billion and generates annual revenue of just over $1 billion.
Abiomed has the rare distinction of earning a perfect GF Score of 100 out of 100.
Currently, there are just two other companies with a perfect score in the entire GuruFocus coverage universe, and neither of the others are medical device companies.
As you might imagine, Abiomed scores well on nearly every component that is used to determine the GF Score. The company’s best area might be financial strength, where it receives a 10 out of 10 from GuruFocus. The company carries no debt, which out-ranks 99.8% of its industry group. The Altman Z-Score and Piotroski F-Score are very high, showing the company to be sound financially.
The company’s return on invested capital (ROIC) is well ahead of its weighted average cost of capital (WACC), indicating that it is allocating funds in a manner that is positively impacting the business.
Profitability is 10 out of 10 as well, with most of Abiomed’s scores greatly outpacing the majority of the company’s peer group. Especially impressive is that the company has had 10 years of profitability over the past decade, placing Abiomed above 99.8% of the competition.
Abiomed’s weakest area is momentum, where it still scores a respectable 8 out of 10. The company’s score is dragged down by the recent relative strength indexes, which are well behind its peers. On the plus side, the stock’s total return over from 12 months to one month ago is better than 62% of the industry.
Shares of Abiomed look undervalued according to the GF Value chart.
Abiomed closed Friday’s trading session at $268.23. The stock has a GF Value of $353.79, implying a potential return of almost 32% were Abiomed to reach this level. Shares of the company are rated as modestly undervalued.
Edwards Lifesciences
The second name for consideration is Edwards Lifesciences Corporation (EW, Financial), which provides products and innovative technologies that help physicians treat patients with structural heart disease. The $62 billion company has annual revenue of $5.2 billion.
Edwards Lifesciences’ GF Score is almost as strong as Abiomed's at 98 out of 100. Only 18 companies in total have a 98 or higher.
Edwards Lifesciences receives a perfect score on both profitability and growth from GuruFocus. The company has top notch margins, with the gross margin, operating margin and net margin all beating at least 88% of the industry group. All marks are at or near Edwards Lifesciences’ best performances over the last decade. The company has also seen a decade of profitability, something most others were not able to duplicate.
Turning to growth, Edwards Lifesciences’ three-year revenue and three-year earnings per share without non-recurring items growth rates beat approximately two-thirds of the industry. Future growth looks to be a positive in the company’s favor as expected earnings growth over the next three to five years is higher than three-fourths of the competition.
Financial strength is robust, with Edwards Lifesciences earning a 9 out of 10. The company’s cash-to-debt and debt-to-equity scores are in the middle of the pack, but Edwards Lifesciences leaves its peers behind in interest coverage. The company has very strong showings on the Piotroski F-score and Altman Z-score, reflecting its strong financial position.
Edwards Lifesciences’ ROIC is nearly triple its WACC. Being able to generate good rates of return on invested capital goes a long way in separating the company from its peer group.
Edwards Lifesciences has its worst showing in value, where it receives just a 6 out of 10. This is due to weak scores on a variety of valuation methods such as the price-earnings ratio, where the stock has a higher valuation than most of its peers. The worst category is the price-book ratio, where Edwards Lifesciences has a worse score than 92% of the competition. Most of the scores in this category are also closer to the low end of the company’s 10-year historical performance.
That said, Edwards Lifesciences still looks to trade below its GF Value.
Edwards Lifesciences most recently traded at $99.43. The GF Value is $106.75, giving the stock a price-to-GF-Value ratio of 0.93. Shareholders could be looking at a 7.4% return if the stock were to reach its GF Value. Edwards Lifesciences is rated as fairly valued, but is at its largest discount to fair value in more than a year.
Final thoughts
Difficult market moves make identifying high-quality names even more important. The GF Score gives an assessment of a stock’s ability to produce returns bassed on historically proven indicators. Abiomed, with its perfect GF Score, and Edwards Lifesciences, with its near-perfect score, are two of the top-rated names not only in the medical device industry, but the entire market.
I believe Abiomed has the more upside potential of the two names, but Edwards Lifesciences is at one of its lowest price-to-GF-Value ratios in some time. For investors looking for exposure to the medical device industry, Abiomed and Edwards Lifesciences could be excellent options.
