Medical Stocks

Edwards Lifesciences Corp Valuation – August 2016 $EW

Benjamin 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 10 Companies Benjamin Graham Would Invest In Today - July 2016.  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 Corp (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 manufactures heart valve systems and repair products used to replace or repair a patient’s diseased or defective heart valve. It develops hemodynamic monitoring systems used to measure a patient’s cardiovascular function in the hospital setting. The Company conducts operations around the world and is managed in various geographical regions, including the United States, Europe, Japan, and Rest of World. All regions sell products that are used to treat advanced cardiovascular disease. The Company’s products and technologies it offers to treat advanced cardiovascular disease are categorized into three areas: Transcatheter Heart Valve Therapy, Surgical Heart Valve Therapy and Critical Care.

EW Chart

EW data by YCharts

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Downloadable PDF version of this valuation:

ModernGraham Valuation of EW – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $24,160,981,533 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 4.15 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 329.43% Pass
6. Moderate PEmg Ratio PEmg < 20 44.96 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 9.93 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 4.15 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.40 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EW value chart August 2016

EPSmg $2.51
MG Growth Estimate 15.00%
MG Value $96.69
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $36.41
MG Value based on 0% Growth $21.35
Market Implied Growth Rate 18.23%
Current Price $112.91
% of Intrinsic Value 116.78%

Edwards Lifesciences Corp is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.02 in 2012 to an estimated $2.51 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 18.23% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Edwards Lifesciences Corp revealed the company was trading above its Graham Number of $25.87. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 44.96, which was above the industry average of 40.07. Finally, the company was trading above its Net Current Asset Value (NCAV) of $1.86.

Edwards Lifesciences Corp receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

EW charts August 2016

Net Current Asset Value (NCAV) $1.86
Graham Number $25.87
PEmg 44.96
Current Ratio 4.15
PB Ratio 9.93
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Total Current Assets $1,985,100,000
Total Current Liabilities $478,200,000
Long-Term Debt $602,500,000
Total Assets $4,051,400,000
Intangible Assets $838,100,000
Total Liabilities $1,580,200,000
Shares Outstanding (Diluted Average) 217,300,000

Earnings Per Share History

Next Fiscal Year Estimate $2.56
Dec2015 $2.25
Dec2014 $3.74
Dec2013 $1.71
Dec2012 $1.23
Dec2011 $0.99
Dec2010 $0.92
Dec2009 $0.98
Dec2008 $0.55
Dec2007 $0.47
Dec2006 $0.53
Dec2005 $0.32
Dec2004 $0.01
Dec2003 $0.32
Dec2002 $0.23
Dec2001 -$0.05

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.51
Dec2015 $2.32
Dec2014 $2.14
Dec2013 $1.28
Dec2012 $1.02
Dec2011 $0.87
Dec2010 $0.77
Dec2009 $0.66
Dec2008 $0.46
Dec2007 $0.38
Dec2006 $0.32
Dec2005 $0.20
Dec2004 $0.13
Dec2003 $0.16
Dec2002 $0.06
Dec2001 -$0.02

Recommended Reading:

Other ModernGraham posts about the company

15 Best Stocks For Value Investors This Week – 2/13/16
Edwards Lifesciences Corp Valuation – February 2016 $EW
The Best Companies of the Medical Industry – September 2015
15 Best Stocks For Value Investors This Week – 9/12/15
Edwards Lifesciences Corporation Analysis – September 2015 Update $EW

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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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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