Edwards Lifesciences (EW) is a surprisingly undervalued company given its long-term history of impressive financial results. The company ranks strongly on GuruFocus’ Financial Strength and Profitability/Growth metrics, qualifying it as a selection of the Predictable Undervalued Companies Screener.
Given its strong fundamentals, EW shares have predictably performed very well on the back of consistently rising revenues and earnings.
History
Company history taken from its About Us webpage.
Comments: A long history of innovation, allowing them to become a leader in tissue replacement, heart valves and repair products and advanced hemodynamic monitoring. The company’s products have helped treat >2m patients worldwide.
Edwards Lifesciences’ business
Edwards Lifesciences is the global leader in the science of heart valves and hemodynamic monitoring, with more than five decades of experience in partnering with clinicians to develop life-saving innovations.
According to its latest Investor Factsheet, major product lines include:
Surgical Heart Valve Therapy:Â Edwards is the world’s leading manufacturer of tissue heart valves and repair products, which are used to treat a patient’s diseased or defective heart valve. The company produces pericardial valves from biologically inert animal tissue sewn onto proprietary wireform stents.
Transcatheter Heart Valve Therapy:Â Edwards has leveraged its knowledge and experience in surgical heart valve therapies to optimize transcatheter heart valve replacement technology, designed to treat heart valve disease using catheter-based approaches.
Critical Care:Â Edwards is a world leader in hemodynamic monitoring systems used to measure a patient’s heart function in surgical and intensive care settings. Hemodynamic monitoring enables a clinician to balance the oxygen supply and fluid management of critically ill patients assuring tissue and organ perfusion, and ultimately patient survival.
The following chart (from its latest Investor Conference) demonstrates its product line split by revenues as well as geographic diversification. Over 95% of sales are from products in #1 global positions, helping serve patients in more than 100 countries worldwide.
Competition
In terms of market share, EW dominates its core markets as seen below:
While their large market shares may imply a limit to growth, it allows EW to maintain strong positions in a still fast-growing industry that requires high R&D spend. EW’s R&D spending capabilities far outweigh its current competitors. Below is a chart breaking out R&D spending by category:
Yahoo! Finance lists EW’s direct competitors as follows:
Financial outlook:
EW management expects organic sales to grow at a higher rate than industry peers over the longer term by focusing on faster growing segments of the market. It also expects to gradually improve Operating Income margins by introducing new products and leveraging SG&A scale. Share repurchases are expected to be the preferred method for returning capital to investors.
2015 estimates are taken from its Financial Outlook presentation:
Risks (10-K, 2014)
- The cardiovascular products industry is characterized by technological changes, frequent new product introductions and evolving industry standards. Without the timely introduction of new and improved products, products could become technologically obsolete or more susceptible to competition and revenues and operating results would suffer.
- In addition, its ability to compete will depend in large part on the ability to develop and acquire new products and technologies, anticipate technology advances and keep pace with other developers of cardiovascular therapies and technologies.
- Its business exposes them to potential product liability risks that are inherent in the design, manufacture and marketing of medical devices.
- The health care industry has been consolidating, and organizations such as GPOs, independent delivery networks, and large single accounts, such as the United States Veterans Administration, continue to consolidate purchasing decisions for many health care provider customers. As a result, purchasing power of these larger customers has increased, and may continue to increase, causing downward pressure on product pricing.
Management
MICHAEL A. MUSSALLEM –Â Chairman and CEO
Michael A. Mussallem has been chairman and chief executive officer since 2000 when the company spun off from Baxter International. Prior to his current position, Mussallem held a variety of positions at Baxter from 1979 until 2000 with increasing responsibility in engineering, product development and general management.
SCOTT B. ULLEM – CFO
Scott B. Ullem was appointed chief financial officer in January 2014. Prior to joining Edwards, he was the chief financial officer of Bemis Company, a global supplier of packaging and pressure sensitive materials used in leading food, consumer and healthcare products. Ullem also had leadership responsibility for one of Bemis' three business segments and the company's information technology function. Before joining Bemis, Ullem spent 17 years in global investment banking, serving as managing director at Goldman Sachs and later for Bank of America.
ISS Governance QuickScore: A score of 1 indicates lower governance risk and 10 indicates higher governance risk. Overall, EW currently ranks as a 9. The individual component scores are: Audit 1; Board 9; Shareholder Rights 7; Compensation 10.
Ownership
Gurus:
Institutions:
Short Interest:
Insiders:
Comments: While insiders only own ~1% of the current share count, they do control ~4% on a diluted share basis through stock options and other incentives.
Valuation
EW’s underlying fundamentals have been very strong over the past decade:
Despite this, shares have traded at a ~10% FCF yield as early as last year.
With the recent price spike however, shares are now trading above their 3-year median P/S and P/B levels. Shares are currently trading near their historical max P/S levels.
Yahoo! Finance has EW growing EPS at ~14% annually over the next five years.
Plugging that rate into GuruFocus’ DCF Tool shows that the shares are roughly fairly valued at current levels.
Conclusion
While the shares are currently fairly valued, it looks to be a decent investment for investors looking to get exposure to a consistent long-term performer with access to secularly growing end-markets. For more ideas like this one, see GuruFocus’ Predictable Undervalued Companies Screener.
