In this article, let's take a look at Edwards Lifesciences Corp. (EW, Financial), a $13.62 billion market cap company that makes and markets a comprehensive line of products and services to treat late-stage cardiovascular disease.
Key to growth
The company now focuses on higher-margin products. Also, in a strategy to pay down its spinoff debt, it decided to sell noncore businesses.
The firm is a leader in its core business of tissue heart valves, with more than 60% of the market. But we have to mention that is smaller than others like Medtronic (MDT, Financial) and St. Jude (STJ, Financial) when looking at sales. A key growth driver is the R&D focus. It invests a significant portion of sales:
- $323 million in 2013 (15.8% of sales)
- $291 million in 2012 (15.3% of sales)
- $246 million in 2011 (14.7% of sales)
We believe the company will continue with this heavy investment in R&D issues in the future. An example is the development of transcatheter aortic valve (TAV) replacement.
Apart from these advances, we expect an increasing aging population so people would have problems with heart valves and heart failure with more frequency. This clearly should benefit the company.
Revenues, margins and profitability
Looking at profitability, revenue grew by 22.55% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.87 vs $0.68). The net income increased by 23.2% when compared to the same quarter one year prior, going from $76.80 million to $94.60 million.
The gross margins increased from 47% in 2000 to 75% in 2013:
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| EW | Edwards Lifesciences | 46.99 |
| VAR | Varian Medical Systems Inc | 23.96 |
| BSX | Boston Scientific Inc | 4.38 |
| SNN | Smith & Nephew PLC | 12.29 |
| HOLX | Hologic Inc | 0.87 |
| Â | Industry Median | 5.20 |
The company has a current ROE of 46.99% which is higher than the industry median and the ones exhibit by Varian Medical Systems Inc (VAR, Financial), Boston Scientific Inc (BSX, Financial), Smith & Nephew PLC (SNN, Financial) and Hologic Inc. (HOLX, Financial).
In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 17.6x, trading at a discount compared to an average of 85.9x for the industry. To use another metric, its price-to-book ratio of 6.60x indicates a premium versus the industry average of 3.88x while the price-to-sales ratio of 6.2x is above the industry average of 3.41x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $31,132, which represents a 25.5% compound annual growth rate (CAGR).
Due to its earnings growth, this stock has surged by 113.36% over the past year.
Final comment
The firm maintains a leadership position, and we expect the same for the future. Further, the PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Jean-Marie Eveillard (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jim Simons (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
