BIBL - Edwards Lifesciences Plunges Post-Earnings Bears Remain In Control

Summary

• The Health Care sector continues to generate alpha in 2022, but not all of its holdings are a source of relative safety.
• Edwards Lifesciences reported a poor Q3 and slashed guidance. Traders reacted harshly to the EPS miss.
• The stock still looks on the pricey side but is cheap relative to its pre-pandemic multiple.

The Health Care sector is down just 5% total return for the year, beating the S&P 500 by more than 10 percentage points. The iShares U.S. Medical Devices ETF (IHI) has not fared so well, though. One of its biggest components issued a weak Q3 earnings report and cut profit guidance. The stock reacted sharply negatively on Friday, but is the stock a value now? Is today's big drop capitulation? Let's inspect the situation.

Health Care Outperforming, Medical Device Stocks Remain Down Big In 2022

According to Bank of America Global Research, Edwards Lifesciences (EW) provides devices and technologies for structural heart disease, and critical care and surgical monitoring. EW is a leader in transcatheter heart valve replacement - one of the most visible and innovative markets in the medical device sector.

The California-based $53.5 billion market cap Health Care Equipment & Supplies industry company within the Health Care sector trades at a high 30.7 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal. The stock traded sharply lower on Friday following a guidance cut in its Q3 earnings report and a bottom-line miss .

EW has come under attack as interest rates have shot higher in 2022. The high-growth name has been an underperformer, but the stock could rebound if rates cool off as some pundits expect. With a high earnings multiple, there's the risk of further compression. Still, the firm's P/E averaged around 34 pre-pandemic, so it is reasonable to think that a lot of negativity has been priced into the stock in the last few months. Risks include a contraction in Transcatheter aortic valve replacement (TAVR) sales and a lessening of its total addressable market as well as poor clinical trial developments.

Taking Friday's 18% plunge into account, the latest forward operating P/E is now 28. Analysts at BofA see earnings rising well this year but then slowing in 2023. The Bloomberg consensus forecast is slightly more optimistic than BofA's for next year. EPS is then expected to rebound strongly in 2024, but high discount rates mean those per-share profits are less valuable now than, say, at the start of the year. The company is expected to reinstitute a dividend which should then climb through 2024. The firm's EV/EBITDA multiple remains high even after the recent plummet, and EW's free cash flow yield looks soft.

EW: Earnings, Valuation, Dividend Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon shows a key December 8 Investor Day which could lead to share price volatility. Following that event comes the firm's Q4 earnings date unconfirmed for Wednesday, January 25 after market close.

Corporate Event Calendar

The Technical Take

It's always tough to try to find support on a chart where the price is in freefall. For EW, I see some modest support near $66 - the pullback low following the COVID crash. Unfortunately, the stock has fallen bearishly below a downtrend support line that began a year ago. A topping pattern from late 2021 through early this year looks more definitive now. Shares confirmed a downtrend by failing at an attempt to climb above the 200-day moving average during the summer.

Making matters worse for the bulls is that the volume-by-price indicator on the left side of the chart shows a significant amount of shares traded up to the low $80s, so any rally attempt could be met with bearish overhead supply. I would hold off on EW for now - we need to see signs of technical stabilization.

EW: No Definitive Areas Of Support

The Bottom Line

EW still does not look like a solid value yet and its chart has technical damage despite today's trading action that has some hallmarks of capitulation. I'd shy away from EW for now until we see better signals that bearish momentum is slowing.

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