As 2021 ended, the stock traded near the $130 level. Since then, it wound its way down to around $64 before pulling itself back up to $82.01 (at the close on May 26).
It is true the company was affected by the Covid-19 pandemic; it makes products for cardiac patients and found its sales constricted for obvious reasons.
Still, one would think long-term investors would swoop in before the share price regains its footing. Why might they buy Edwards? Because it has an excellent set of fundamentals that should deliver more outstanding returns over the next three to five years.
The company goes back to 1958, when Miles Edwards, a retired engineer with a background in hydraulics and fuel pump operations, set out to build the first artificial heart.
Medical advisors suggested a full heart was too ambitious a target, and so Edwards designed and developed what became known as the Starr-Edwards mitral valve. When the first valve was successfully placed, the result was termed “miraculous” by some.
Today, the company is a major vendor of cardiac products with a market cap of $49.50 billion and 2022 revenue of $5.38 billion. It has a broad range of technologies grouped into four product areas: transcatheter heart valves, transcatheter mitral technologies, critical care technologies and surgical valve technologies.
The lion’s share of revenue is generated by the Transcatheter Aortic Valve Replacement, or TAVR, group. And while Edwards may have been a pioneer in this field, it currently faces significant competition. The biggest challenges come from Medtronic PLC (MDT, Financial) and Abbott Laboratories (ABT, Financial).
Edwards remains a strong competitor, though, because it has numerous competitive advantages. They include:
- Its ability to develop and produce safe and effective therapies.
- What it claims are “superior clinical outcomes.”
- “Most recognizable cardiovascular device product brands for treating structural heart disease.”
Those competitive advantages show up in Edwards' fundamentals. It earns an excellent GF Score of 98 out of 100.
The company enjoys a high financial strength rating because its debt is relatively small. Specifically, at the end of the first quarter of 2023, it had $597 million in debt, while its revenue was (on a trailing 12-month basis) $5.59 billion. That provides a debt-to-revenue ratio of 0.11.
Its Altman Z-Score is very high at 14.4 on a scale in which the safe zone begins at 3. Similarly, it has an outstanding record for creating value from shareholder capital. Over the past dozen years, its returns on invested capital have been more than twice the weighted average cost of capital.
Profitability is also high with industry-leading operating and net margins. The operating margin is 32.34%, while the median for the medical devices and instruments industry is 0.64%. Its net margin is 27.07% compared to the industry median of -1.69%.
Growth rates are not particularly high, but solid and structured the way investors like. Over the past three years, revenue growth has averaged 8.10% per year, Ebitda has averaged 15.50% per year and earnings per share without non-recurring items has averaged 14.20% per year.
Note that earnings have grown faster than revenue, indicating that Edwards has been using its resources efficiently and effectively.
Continuing in the growth category, GuruFocus reports free cash flow has grown by an average of 2.40% per year over the past three years. In its annual 10-K filing, the company provided these charts showing three types of cash flow:
Edwards went on to explain that operating cash flow declined in 2022 because of higher tax payments, a greater inventory build compared to 2021 and larger bonuses (for 2021 performance).
The company does not pay a dividend, so that’s not a drag on free cash flow. However, it has repurchased shares in each of the past three years. In 2022, it spent $1.727 billion to buy back 20.1 million shares, which was a reasonable decision because the share price declined throughout most of the year.
However, it also bought back shares in 2020 ($625 million) and 2021 ($513 million), when share prices were rising quickly.
All in all, then, Edwards is a quality company, and it is available for a fair or undervalued price.
The GF Value chart considers it to be modestly undervalued. It sees intrinsic value of $109.44, while the closing price on May 26 was $82.01.
The price-earnings and PEG ratios conclude it is slightly overvalued. Edwards has a price-earnings ratio of 34.03, which is higher than the industry median of 28.73. The PEG ratio, at 2.25, is just in the overvalued range (fair value is 1 to 1.99).
Because the company has a high predictability ranking, 4.5 out of five stars, it can be assessed using the discounted cash flow calculator (earnings-based). The calculator put the intrinsic value at $64.46, which is 27.23% below the current value of $82.01.
Finally, on valuation, the current price is well below the chart trendline price of $138.36.
It seems there is a price for everyone: low, high and fair. As one who believes in reversion to the mean, I expect the share price will rise, eventually, to something closer to the trendline price.
Apparently, the price suits many gurus. Seventeen of them had positions in Edwards at the end of the first quarter. The three biggest positions, according to 13F filings, were:
- Vanguard Health Care Fund (Trades, Portfolio) with 9,662,088 shares that account for 1.59% of Edwards’ shares outstanding and 1.75% of the fund’s equity portfolio.
- Ken Fisher (Trades, Portfolio) of Fisher Asset Management held 7,817,059 shares.
- Frank Sands (Trades, Portfolio) of Sands Capital Management owned 6,207,824 shares.
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
There’s no doubt Edwards Lifesciences is a quality company, one capable of richly rewarding shareholders in years to come. Based mainly on the price chart, I consider the stock to be somewhat undervalued, but others, using other criteria, may see it as fairly valued or overvalued.
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