Edwards Lifesciences Fundamental Analysis

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Edwards Lifesciences

Last Updated: 28 Nov 2022

NYSE: EW

GICS Sector: Healthcare

Sub-Industry: Medical Devices

https://www.edwards.com

Management

CEO: Mike Mussallem

Tenure: 23.8 years

Edwards Lifesciences Corporation's management team has an average tenure of 8.8 years. It is considered experienced.

Edwards Lifesciences Mangement

Source of Revenue

Edwards Lifesciences Corporation provides products and technologies for structural heart disease, and critical care and surgical monitoring in the United States, Europe, Japan, and internationally.

The company manufactures heart valve systems and repair products used to replace or repair a patient's diseased or defective heart valve. This includes both surgical and transcatheter therapies for heart valve replacement and repair.

The company also specialises in hemodynamic and non-invasive brain and tissue oxygenation monitoring systems used to measure a patient's cardiovascular function in the hospital setting.

Edwards Lifesciences products and technologies are categorised into four main areas: Transcatheter Aortic Valve Replacement, Transcatheter Mitral and Tricuspid Therapies, Surgical Structural Heart, and Critical Care.

Transcatheter Aortic Valve Replacement

This technology is designed for the minimally invasive replacement of aortic heart valves. The Edwards SAPIEN family of valves, including Edwards SAPIEN XT, and the Edwards SAPIEN 3 Ultra transcatheter heart valves, and their respective delivery systems, are used to treat heart valve disease using catheter-based approaches for patients who have severe symptomatic aortic stenosis and certain patients with congenital heart disease.

Transcatheter Mitral and Tricuspid Therapies

This technology is designed to treat mitral and tricuspid valve diseases. While many of these technologies are in the development and clinical phases, the PASCAL and Cardioband transcatheter valve repair systems are commercially available in Europe for mitral and tricuspid valve repair. The PASCAL system provides a differentiated, minimally invasive therapy to address the needs of patients with mitral or tricuspid regurgitation through leaflet approximation, while the Cardioband system enables clinicians to reduce the valve's annulus to restore a patient’s mitral or tricuspid valve to a more functional state and lower regurgitation.

Surgical Structural Heart

RESILIA tissue is helping Edwards Lifesciences to redefine tissue durability standards. KONECT RESILIA, the first pre-assembled, aortic tissue valved conduit, for patients who require replacement of the valve, root, and ascending aorta, continue to gain sales traction in the United States.

Critical Care

Edwards Lifesciences also specialises in advanced hemodynamic monitoring systems used to measure a patient's heart function and fluid status in surgical and intensive care settings. Hemodynamic monitoring plays an important role in enhancing surgical recovery. Edwards Lifesciences’ complete hemodynamic portfolio helps clinicians make proactive clinical decisions that can improve patient outcomes. The portfolio includes the minimally invasive FloTrac and Acumen IQ sensors, and the non-invasive ClearSight and Acumen IQ cuffs.

Edwards Lifesciences customers include physicians, nurses, and other clinical personnel, but can also include decision makers such as service line leaders, material managers, biomedical staff, hospital administrators and executives, purchasing managers, and ministries of health.

In the United States, Edwards Lifesciences sells all its products through its direct sales forces, while it distributes its products through independent distributors outside of the United States.

Edwards Lifesciences Source of Revenue

Edwards Lifesciences Fundamental Analysis | Edwards Lifesciences Reportable Segment Revenue | Fundamental Analysis by The Globetrotting Investor

Edwards Lifesciences Reportable Revenue by Product

Edwards Lifesciences Reportable Revenue by Geography

Edwards Lifesciences Economic Moat

Economic Moat: Narrow

There are many ways to identify Edwards Lifesciences’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Edwards Lifesciences. Please check my summary to understand more about the economic moat.

Performance Checklist

Edwards Lifesciences Performance Checklist

Is Edwards Lifesciences’s revenue growing YoY for the past 5 years consistently? Yes.

Is the net income growing YoY for the past 5 years consistently? Inconsistent.

Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.

Is the free cash flow positive for the past 5 years? Yes.

Is the gross margin % consistent/ growing for the past 5 years? Yes.

Is the EPS growing for the past 5 years? Inconsistent.

Edwards Lifesciences Fundamental Analysis | Edwards Lifesciences Revenue, Net Income, Operating Cash Flow, and FCF | Fundamental Analysis by The Globetrotting Investor

Edwards Lifesciences Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)

Is the free cash flow per share growing for the past 5 years? Inconsistent.

Edwards Lifesciences FCF per Share

Management Effectiveness

Edwards Lifesciences Management Effectiveness

Is Edwards Lifesciences’s ROE consistently at 12%-15% YoY for the past 5 years? Yes.

Edwards Lifesciences Return on Equity

Is the ROIC consistently at 12%-15% YoY for the past 5 years? Yes.

Edwards Lifesciences Return on Invested Capital vs Weighted Average Cost of Capital

The trendline for the number of shares outstanding is decreasing, which is something that an investor would be pleased to see.

Edwards Lifesciences Fundamental Analysis | Edwards Lifesciences Shares Outstanding | Fundamental Analysis by The Globetrotting Investor

Edwards Lifesciences Shares Outstanding (Million Shares)

Edwards Lifesciences Financial Health

Edwards Lifesciences Financial Health (USD Million)

Current Ratio: 3.83 (pass my requirement of >1.0)

Debt-to-EBITA: 0.35 (pass my requirement of <3.0)

Interest Coverage: N/A (pass my requirement of >3.0)

Debt Servicing Ratio: 1.06% (pass my requirement of <30.0%)

Edwards Lifesciences Valuation

Estimated intrinsic value: $51.83

Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.

Average free cash flow used: $1,100M

Projected growth rate: 12% - 14%

Beta: 1.06

Discount rate: 7.5%

Date of calculation: 28 Nov 2022

Edwards Lifesciences Valuation

Edwards Lifesciences Price-Earnings Ratio vs its peers

Edwards Lifesciences Historical Price-Earnings Ratio

Additional Resources

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Edwards Lifesciences Stock Performance

The following graph compares the performance of Edwards Lifesciences common stock with that of the S&P 500 Index and the S&P 500 Health Care Equipment Index. The cumulative total return listed below assumes an initial investment of $100 at the market close on December 31, 2016, and reinvestment of dividends. Stockholder return over the indicated period should not be considered indicative of future stockholder returns.

Edwards Lifesciences Stock Performance

My Top Concern

The continued growth and success depend on Edwards Lifesciences’ ability to innovate and develop new and differentiated products in a timely manner and effectively market these products. Without the timely innovation and development of products, Edwards Lifesciences products could be rendered obsolete or less competitive by changing customer preferences or because of the introduction of a competitor’s newer technologies. Failure in innovating new products could have a material impact on Edwards Lifesciences.

In addition, the company faces substantial competition and competes with companies of all sizes based on cost-effectiveness, technological innovations, product performance, brand name recognition, breadth of product offerings, real or perceived product advantages, pricing and availability and rate of reimbursement. Given the trend toward value-based healthcare, if Edwards Lifesciences is not able to continue to demonstrate the full value of its differentiated products to healthcare providers and payors, its competitive position could be adversely affected.

Lastly, if the government and other third-party payors decline to reimburse Edwards Lifesciences’ customers for its products or impose other cost containment measures to reduce reimbursement levels, the ability to profitably sell its products will be impacted.

My Top Concern

Summary for Edwards Lifesciences

Edwards Lifesciences’ narrow economic moat mainly stems from its intangible assets and switching costs.

Its differentiated technology in the area of cardiac devices has helped Edwards Lifesciences to maintain leadership in surgical heart valves and minimally invasive valve therapy. In a rather mature and competitive market, Edwards Lifesciences specifically dominates the tissue value segment. Like many other device companies, Edwards Lifesciences competes based on technological innovation, intellectual property, and close relationships with physicians.

The company also maintains a leadership position in critical-care monitoring equipment to complement its heart valves.

Another determinant of Edwards Lifesciences’ moat is its switching cost. Switching costs are costs that customers or businesses incur because of changing brands, suppliers, or products. Although the most common switching costs are monetary, there are also psychological, effort-based, and time-based switching costs.

Surgeons or physicians need to be trained on each device before they can use it. Competitors will have a hard time convincing these surgeons or physicians as there is resistance, both effort-based and time-based, for them to learn how to use a totally new device.

Although Edwards Lifesciences excels in both intangible assets and switching costs, the company lacks other areas such as creating a larger barrier to entry. As such, I only assign a narrow economic moat for Edwards Lifesciences.

Summary for Edwards Lifesciences

Edwards Lifesciences’ performance is only inconsistent because it got hit quite badly in the fiscal year of 2020 due to the pandemic. If you look at a longer time horizon, its revenue and earnings are on an uptrend. Henceforth, I am not concerned about Edwards Lifesciences’ performance as I think the company did well. Both its gross and net margins are also above industry averages.

Edwards Lifesciences’ ROE and ROIC are above the minimum requirements of 15% over the past 5 years consistently. Its current ROE of 24.8% is higher than its industry average and its current ROIC is almost three times its WACC. This might indicate that Edwards Lifesciences is efficient at allocating its capital.

But what stood out is the company balance sheet. Edwards Lifesciences not only met my requirements for the current ratio, debt-to-EBITA, and debt servicing ratio but also achieved higher than the industry average. There is no data for its interest coverage as Edwards Lifesciences' interest expense for the last three months was $0. The company has also more cash than its total debt.

Despite having good performance, efficient capital allocation and stable financial health, I will still give a margin of safety of 35%. So, with an estimated intrinsic value of $51.83, I will only purchase the stock if the price is trading around the $35 range.

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Edwards Lifesciences Fundamental Analysis