Medical Stocks

Edwards Lifesciences Corporation Quarterly Valuation – November 2014 $EW

edwardsBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – November 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Edwards Lifesciences Corporation (EW) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Edwards Lifesciences Corporation (Edwards Lifesciences) is focused on technologies that treat structural heart disease and critically ill patients. A pioneer in the development and commercialization of heart valve products, Edwards Lifesciences is the manufacturer of tissue heart valves and repair products used to replace or repair a patient’s diseased or defective heart valve. The Company also provides hemodynamic monitoring systems used to measure a patient’s cardiovascular function in the hospital setting. The products and technologies provided by Edwards Lifesciences to treat advanced cardiovascular disease or critically ill patients are categorized into three main areas: Surgical Heart Valve Therapy, which combines surgical heart valves and Cardiac Surgery Systems; Transcatheter Heart Valves; and Critical Care, which includes Vascular. In October 2012, it acquired BMEYE B.V.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $129.68
MG Value $101.77
MG Opinion Overvalued
Value Based on 3% Growth $42.19
Value Based on 0% Growth $24.73
Market Implied Growth Rate 18.04%
Net Current Asset Value (NCAV) $9.24
PEmg 44.57
Current Ratio 5.39
PB Ratio 6.88

Balance Sheet – September 2014

Current Assets $2,309,000,000
Current Liabilities $428,000,000
Total Debt $596,000,000
Total Assets $3,350,000,000
Intangible Assets $405,000,000
Total Liabilities $1,307,000,000
Outstanding Shares 108,400,000

Earnings Per Share

2014 (estimate) $3.33
2013 $3.44
2012 $2.48
2011 $1.98
2010 $1.83
2009 $1.95
2008 $1.10
2007 $0.94
2006 $1.05
2005 $0.64
2004 $0.02

Earnings Per Share – ModernGraham

2014 (estimate) $2.91
2013 $2.58
2012 $2.05
2011 $1.75
2010 $1.55
2009 $1.31

Dividend History
Edwards Lifesciences does not pay a dividend.

Conclusion:

Edwards Lifesciences Corp is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the lack of dividends as well as the high PEmg and PB ratios, while the Enterprising Investor is only concerned by the lack of dividend payments.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.55 in 2010 to an estimated $2.91 for 2015.  This level of demonstrated growth, while strong, does not support the market’s implied estimate of 18.04% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out previous ModernGraham valuations of Edwards Lifesciences Corporation (EW) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Edwards Lifesciences Corporation (EW)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Edwards Lifesciences Corporation (EW) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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