EW - Edwards Lifesciences: Solid Not Spectacular

2023-03-28 17:33:35 ET

Summary

• Edwards Lifesciences Corporation saw solid underlying growth in 2022, held back by a strong dollar.
• The 2023 earnings guidance is a bit underwhelming, as long-term growth trends remain intact.
• Edwards Lifesciences Corporation shares deserve a long-term premium in my view, as I still see long-term appeal here.

In October, I believed that shares of Edwards Lifesciences Corporation ( EW ) were opening my heart as shares were cut in half from the highs seen the year before. This pullback was the result of higher interest rates and a reversal of far too strong momentum in 2021. Despite the huge pullback, I believed that the valuation remained demanding, amidst solid underlying strength, as the long-term quality of the company prevailed in my investment thesis.

The Thesis

Edwards Lifesciences is all about the heart, having developed a portfolio of heart valve systems and repair products for defective valves, both in surgical and transcatheter therapies.

The company has seen huge growth from about a billion in sales in the mid 2000s, to $3 billion in 2016, and to $5.2 billion in 2021. The company grew revenues that year by 19%, as growth was not really representative of course as 2020 was a bit of an unusual year.

The company has grown margins over time as GAAP operating profits rose to $1.6 billion, translating into realistic margins of 30%, with GAAP earnings reported at $2.38 per share, and adjusted earnings reported at $2.22 per share. The 631 million shares peaked at $130 late in 2021, creating a peak valuation of about $82 billion. Needless to say, these were very demanding multiples at about 15 times sales and a realistic earnings multiple around 60 times earnings.

The 2022 outlook was relatively modest, as sales were seen up to $5.5 to $6.0 billion, as adjusted earnings were seen up modestly to $2.50-$2.65 per share. After posting a solid 10% increase in first quarter sales, second quarter sales came in flat, albeit hurt by the impact of a strong dollar. The company cut the midpoint of the earnings guidance to $2.45 per share after the company posted a 1% drop in third quarter sales as currency headwinds peaked. This made that shares fell to $70 in October, reducing the earnings multiple towards 28 times earnings, as sales were seen at $5.45 billion.

Amidst operational challenges the company made some progress on the operational front with FDA approval given for the PASCAL Precision product and the SAPIEN 3 Ultra RESILIA valve, as this provides hope for an acceleration of growth in the periods to come.

With shares down to $70 and the company operating with a $2.5 billion net cash position (equal to $4 per share), the valuation had fallen to 7.5 times sales and 26 times earnings, still resulting in a demanding multiple, but by no means as demanding as has been the case in the past. In either case, the earnings yield of nearly 4% was trailing risk-free rates, although the company clearly remains well positioned to deliver on solid long term growth.

Given this, I was a buyer, which added to a long-term position at $70 per share.

A Modest Rebound

Since the big pullback in October, shares of Edwards Lifesciences Corporation have traded in a $70-$85 range, with shares currently trading at $80 per share.

Support for the shares arrived soon as the company announced a $750 million accelerated buyback program early in November, taking advantage of the drop in the share price. The company announced more good news on the development front as CEO Mr. Mussallem announced his decision to retire, after having reached the respective age of 70 years.

The company announced some upbeat long term goals in December, announcing a 2023 guidance at the same time as well. For 2023, the company sees sales up between 9-12% to $5.6-$6.0 billion with adjusted earnings seen between $2.45 and $2.60 per share.

In January the company announced its fourth quarter results with reported sales up 1% to $1.35 billion, as constant currency growth came in at 7%. For the year revenues rose in a modest fashion from $5.23 billion to $5.38 billion, with growth held back by the strong dollar as adjusted earnings rose from $2.22 to $2.48 per share.

The latter was aided by some buybacks which reduced the float a bit, but the company still holds a net cash position around $1.8 billion. The company reiterated its full year guidance which shows that solid revenue growth is expected, but earnings per share are likely seen flattish which is a bit disappointing.

On the other hand, the near-term outlook is not too appealing from a growth point of view, but the long-term outlook remains good, as that ultimately should bode well for sales growth and earning of course.

And Now?

The reality is that a 15% return in the time frame of just about 5 months is very decent, certainly in this environment. While the 2023 earnings outlook is a bit underwhelming, I still perceive Edwards Lifesciences Corporation to be quality here and that quality should prevail in the long run, despite the small gap to risk free rates.

Hence, I am not yet willing to take profits on this Edwards Lifesciences Corporation position, having taken a long-term view and position here as underlying growth for 2023, while not spectacular, is still very reasonable.

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