Medical Stocks

Edwards Lifesciences Corporation Analysis – June 2015 Update $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 – May 2015.  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 stock analysis showing a specific look at how Edwards Lifesciences Corporation (EW) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Edwards Lifesciences Corporation is focused on technologies that treat structural heart disease and critically ill patients. The Company is engaged in the development and commercialization of heart valve therapies. It is a manufacturer of heart valve systems and repair products used to replace or repair a patient’s diseased or defective heart valve. The Company develops hemodynamic monitoring systems used to measure a patient’s cardiovascular function in the hospital setting. Patients in the hospital setting, including high-risk patients in the operating room or intensive care unit, are candidates for having their cardiac function or fluid levels monitored by the its Critical Care products. The Company’s products and technologies it offers to treat advanced cardiovascular disease are categorized into three main areas: Transcatheter Heart Valve Therapy, Surgical Heart Valve Therapy and Critical Care.

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 $134.81
MG Value $174.33
MG Opinion Fairly Valued
Value Based on 3% Growth $65.66
Value Based on 0% Growth $38.49
Market Implied Growth Rate 10.64%
Net Current Asset Value (NCAV) $8.88
PEmg 29.77
Current Ratio 5.57
PB Ratio 6.72

Balance Sheet – March 2015

Current Assets $2,255,000,000
Current Liabilities $405,000,000
Total Debt $603,000,000
Total Assets $3,488,000,000
Intangible Assets $389,000,000
Total Liabilities $1,275,000,000
Outstanding Shares 110,300,000

Earnings Per Share

2015 (estimate) $4.16
2014 $7.48
2013 $3.42
2012 $2.48
2011 $1.98
2010 $1.83
2009 $1.95
2008 $1.10
2007 $0.94
2006 $1.05
2005 $0.64

Earnings Per Share – ModernGraham

2015 (estimate) $4.53
2014 $4.29
2013 $2.57
2012 $2.05
2011 $1.75
2010 $1.55

Dividend History
Edwards Lifesciences does not pay a dividend.

Conclusion:

Edwards Lifesciences qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the lack of dividends, along with the high PEmg and PB ratios.  The Enterprising Investor is only concerned with the lack of dividends.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.75 in 2011 to an estimated $4.53 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 10.64% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

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 (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 any 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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