Edwards Lifesciences Corporation (EW) is an international leader in patient-focused medical applications for structural heart disease and critical-care monitoring. The company’s market-leading position in the space has lasted over six decades, allowing the company to develop a considerable moat amongst its peers.
Cardiovascular disease remains the topmost cause of death globally, and it is also the number-one disease in terms of health care spending, in almost every country. The disease is progressive, which means that it tends to worsen over time, frequently altering the structure of one’s heart. Hence, the company’s critical medical devices have grown in demand over the years, as reflected in Edwards’ financials and the very successful trajectory of its stock.
Edwards’ shares have almost quadrupled over the past five years, while the company’s financials continue to perform very strongly in the recent quarters. However, investors need to pay attention to its hefty valuation, which could imply headwinds to future returns. (See Analysts’ Top Stocks on TipRanks)
Q3 Results: Growth Continues
Edwards’ revenues for the third quarter ended September 30, 2021, coming in at $1.3 billion, 15% higher year-over-year, with all four of the company’s divisions delivering solid sales growth. In fact, Q3’s growth was rather impressive since the company’s Transcatheter Aortic Valve Replacement (TAVR) segment’s sales were negatively affected in the last two months of Q3 due to COVID’s impact on hospital resources.
Adjusted gross profit margins came in at 76.3%, compared to 75.5% in Q3-2020, as the company’s operations enjoy economies of scale, driven by a larger top line. Hence, diluted and adjusted EPS were $0.54, versus $0.52 in the comparable period last year.
The company still expects full-year 2021 revenues to land within the previous guidance range of $5.2 to $5.4 billion and adjusted EPS to come out in the high end of $2.07 to $2.27. Assuming EPS lands at a prudent $2.20, this implies year-over-year growth of 66.6% compared to FY2020.
While the company’s performance remains robust, take note of the stock’s valuation before considering Edwards Lifesciences for your portfolio.
The Valuation
Edwards Lifesciences’ shares are currently trading at a sizable premium to its earnings, as well as compared to its industry peer group. Assuming the company delivers EPS of around $2.20 in FY2021, this implies a P/E of 52.
From a forward EV/EBITDA perspective, the stock carries a multiple of 36.8, which is very pricey. For context, the company was trading at a forward EV/EBITDA of around 30X in 2019 and of around 20X in 2015, hence undergoing a considerable expansion.
Analysts expect the company to grow its EPS by a CAGR (compound annual growth rate) of around 11% in the medium term, which I am not convinced justifies these multiples no matter the company’s deep moat and overall qualities.
Along with a lack of any tangible capital returns with which to compensate investors, the stock’s investment case seems rather risky to me. The company has bought back stock occasionally. However, at its current valuation, I doubt future share repurchases will be beneficial to shareholders. I am neutral on the stock.
Wall Street’s Take
Turning to Wall Street, Edwards Lifesciences has a Moderate Buy consensus rating, based on six Buys and three Holds assigned in the past three months. At $127.38, the average Edwards Lifesciences price target implies 13.74% upside potential, nonetheless.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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