Edwards Lifesciences, a leading company in heart disease treatments, is an attractive investment due to its strong market position, innovative products, and clear strategy. With over 60 years of experience, the company is focused on expanding its core heart valve business and growing in new areas. By selling its non-core business and making strategic acquisitions, Edwards aims to drive long-term growth and remain a leader in life-saving heart therapies.
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Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Edwards Lifesciences. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors to Edwards Lifesciences either. Thus, I have no personal stake in Edward Lifesciences. If you want to buy shares (or fractional shares) in Edwards Lifesciences, you can do so at eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
Edwards Lifesciences, founded in California, USA, in 1958, is an American medical company that holds a leading position globally in patient-focused medical innovations for structural heart disease, critical care, and surgical monitoring. The company is particularly renowned for its artificial heart valves. By the end of 2023, Edwards Lifesciences operated four main segments. The largest of these is Transcatheter Aortic Valve Replacement (TAVR), which develops therapies for the nonsurgical replacement of heart valves and accounted for 65% of net sales in 2023. The second-largest segment, Surgical Structural Heart (Surgical), focuses on surgical solutions for structural heart issues, contributing 17% of net sales. The Critical Care segment, which provides solutions for hemodynamic monitoring, represented 15% of net sales. The final segment, Transcatheter Mitral and Tricuspid Therapies (TMTT), is dedicated to developing therapies for mitral and tricuspid diseases and accounted for 3% of net sales in 2023. However, Edwards Lifesciences has decided to sell its Critical Care business to Becton, Dickinson and Company for $4,2 billion, which will reduce its operational focus to three segments moving forward. The company's largest market is the United States, contributing 58% of net sales in 2023, followed by Europe (22%), Japan (8%), and the rest of the world (12%). The company’s management has emphasized that producing heart valves is a complex process that requires extensive experience, which Edwards Lifesciences has accumulated over more than 60 years. This expertise is challenging to replicate, as evidenced by many competitors entering and then exiting the market within a few years, while Edwards Lifesciences continues to maintain its market leadership. Additionally, there are significant switching costs for healthcare professionals considering transitioning to a competitor's products, as such a change requires considerable practice and familiarity with the new product. Thus, the combination of Edwards Lifesciences' extensive experience, robust patent portfolio, and high switching costs creates a substantial competitive moat for the company.
Bernard J. Zovighian is the CEO of Edwards Lifesciences. He joined the company in 2015 and assumed the role of CEO in 2023. Before joining Edwards Lifesciences, he held various roles of increasing responsibility at Johnson & Johnson. He holds dual master's degrees in science and business from the Universities of Marseille, France. As a new CEO, Bernard J. Zovighian has emphasized his commitment to fostering and maintaining the unique culture of Edwards Lifesciences, supporting employee career development, building trusted partnerships, addressing unmet patient needs, and transforming care. In a recent earnings call, he expressed confidence in the company's long-term strategy and its pipeline of innovative therapies, asserting that Edwards Lifesciences is well-positioned to create significant value for patients and healthcare systems, which will drive strong organic sales growth. He also conveyed his belief that successfully executing the company's strategy will result in exceptional shareholder value. While it is too early to fully assess Bernard J. Zovighian's performance as CEO, he brings extensive experience in the sector and within the company. His apparent focus on shareholder interests is a positive indicator, and it will be interesting to observe how he executes the company's strategy in the coming years. Therefore, I am inclined to give him the benefit of the doubt and look forward to seeing his impact on the company's future.
I believe that Edwards Lifesciences possesses a strong moat. However, there are some uncertainties concerning the management due to its relatively recent leadership change. To determine if Edwards Lifesciences meets our criteria for a strong moat, we will now analyze the relevant financial metrics. For a detailed explanation of these metrics, please refer to the "MY STRATEGY" section on the website
The first metric to examine is the return on invested capital (ROIC). Our criteria require a 10-year history with all figures exceeding 10% annually. Edwards Lifesciences’ performance in this regard is highly encouraging, as the company has consistently achieved a ROIC well above 10% for each of the past ten years. Notably, ROIC has remained above 15% throughout this period, which includes challenges such as the pandemic and subsequent macroeconomic headwinds, underscoring the company's resilience and quality. In 2021 and 2022, Edwards Lifesciences delivered a particularly strong ROIC, exceeding 20%. Although there was a decline below 20% in 2023—a challenging year for many businesses—the ROIC still remained significantly above 10% and was higher than in most of the past ten years. Overall, these figures suggest that Edwards Lifesciences has consistently maintained a strong ROIC, reinforcing its position as a high-quality company.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Edwards Lifesciences has demonstrated a consistent ability to grow its equity, with the exception of a slight decrease in 2022. Given that 2022 was a challenging year for many businesses, this decline is not particularly concerning. Moreover, Edwards Lifesciences successfully resumed its equity growth in 2023, achieving an all-time high. This recovery reinforces the company's resilience and its capacity to maintain financial strength despite adverse conditions.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is unsurprising that Edwards Lifesciences has consistently generated positive free cash flow over the past ten years. However, the free cash flow has shown some inconsistency, reaching its lowest level since 2016 in 2023. One reason for this decline is the company's investment in expanding its team within the Transcatheter Mitral and Tricuspid Therapies (TMTT) segment. Management anticipates that free cash flow will grow in 2024 compared to 2023, which is an encouraging outlook. This investment in the TMTT segment has also impacted the levered free cash flow margin, which is currently at its lowest point in the past decade. Although this is somewhat concerning, management expects these investments to drive long-term growth. Additionally, the free cash flow yield remains low, suggesting that the shares are trading at a premium price, a factor that will be revisited later in the analysis.
Another important aspect to consider is the company's level of debt. It is essential to assess whether a business maintains a manageable debt level that can be repaid within three years, which is determined by dividing the total long-term debt by earnings. For Edwards Lifesciences, this calculation reveals that the company has only 0,43 years of earnings in debt, which is well below the three-year threshold. Consequently, debt is not a concern in this case. Historically, Edwards Lifesciences has maintained a low level of debt, suggesting that debt management is unlikely to become a significant issue for the company in the future.
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Based on my findings thus far, I find Edwards Lifesciences to be an interesting company. However, it is important to recognize that no investment is without risk, and Edwards Lifesciences faces several challenges. One significant risk is competition. The company operates in a highly competitive medical technology market, which has intensified following Abbott’s 2024 launch of the TriClip transcatheter edge-to-edge repair system. This new product has impacted Edwards Lifesciences' growth in the TAVR market, particularly in the United States, where Abbott quickly gained market share. Edwards Lifesciences competes against both large multinational corporations and smaller firms based on factors such as innovation, cost-effectiveness, and the timing of market entry. If the company cannot keep pace with technological advancements or demonstrate the value of its products in a cost-sensitive healthcare environment, it risks losing market share to more affordable alternatives. Additionally, the timing of regulatory approvals is crucial; delays can provide competitors with an opportunity to establish a market presence first. Regional competition and frequent new product launches, such as Abbott’s TriClip, highlight the necessity for Edwards Lifesciences to continuously innovate and adapt. Failure to do so could result in slower growth, reduced margins, and increased competitive pressure, making this a critical risk for investors to monitor. Another risk to consider is healthcare legislation and regulatory changes. These factors pose a significant risk to Edwards Lifesciences, as they directly influence product demand, market access, and financial performance. Changes in U.S. laws, such as the Affordable Care Act and the Medicare Access and CHIP Reauthorization Act, could lead to reduced procedure volumes, lower reimbursements, and pricing pressures, which may negatively affect revenue. Internationally, regulatory challenges—such as the ongoing negotiations over the Medical Device Regulation between the European Union and Switzerland—could limit market access and disrupt sales. Furthermore, compliance with anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the UK Bribery Act, is crucial to avoid substantial fines and reputational damage. The uncertainty surrounding regulatory changes presents significant risks for Edwards Lifesciences, potentially resulting in higher costs and operational disruptions that could impact the company's profitability and growth prospects. Another significant risk for Edwards Lifesciences is its reliance on third-party suppliers. The company depends heavily on external suppliers for raw materials, components, and services essential for the design, manufacture, and sterilization of its products. This reliance poses a substantial risk, as any disruption or failure on the part of these suppliers could result in delays, increased costs, and reduced product availability, adversely affecting the company's operations. Several factors can contribute to supply chain interruptions, including economic conditions that impact the financial stability of vendors, decisions by vendors to cease supplying medical technology companies due to regulatory burdens, bans on certain materials, or trade embargoes. Furthermore, because some materials and services are sourced from single suppliers to comply with quality and regulatory standards, finding alternative suppliers can be both challenging and time-consuming, potentially causing production delays. The complexity and highly regulated nature of Edwards Lifesciences' manufacturing processes mean that any disruption could have severe consequences. Issues at any point in the supply chain, including logistical challenges or quality failures by suppliers or partners, could lead to product recalls, delays in product approvals, reputational damage, and significant financial costs.
There are several compelling reasons to consider investing in Edwards Lifesciences. One of the most significant is the strength of its Transcatheter Aortic Valve Replacement (TAVR) segment. This segment is a key driver for investment due to Edwards Lifesciences' market leadership, strong growth trajectory, innovative product pipeline, and potential for expanding treatment indications. The company has experienced robust growth in sales of its SAPIEN 3 Ultra RESILIA heart valve, which has been widely adopted in major markets such as the U.S., Europe, and Japan. Edwards Lifesciences is also actively developing new products and expanding the application of TAVR to a broader patient population. Clinical trials, including PROGRESS and EARLY TAVR, aim to extend treatment to patients with less severe or even asymptomatic aortic stenosis, potentially unlocking a much larger market. Additionally, there is considerable growth potential internationally, as many patients still lack access to TAVR treatments. Edwards Lifesciences' strong commitment to innovation and continuous product development positions it well for sustained success and expansion in this growing market. Another reason to consider investing in Edwards Lifesciences is the potential of its Transcatheter Mitral and Tricuspid Therapies (TMTT) segment. This segment offers a compelling investment opportunity due to its innovative therapies, recent product approvals, and significant growth potential in treating mitral and tricuspid valve diseases. Edwards Lifesciences has expanded its offerings with the PASCAL system for valve repair and the EVOQUE system for valve replacement, the latter recently becoming the first approved transcatheter treatment in the United States for tricuspid regurgitation. This approval enables the company to address a large group of previously underserved patients, significantly enhancing its market potential. As the only company offering a comprehensive range of catheter-based treatments for both mitral and tricuspid valve conditions, Edwards Lifesciences is well-positioned to become a leader in this market. The introduction of new products, such as the SAPIEN M3 for mitral valve replacement, is expected to further strengthen its position and provide more treatment options for patients. In 2023, the TMTT segment grew by 67%, reflecting strong demand for these new treatments, particularly for tricuspid valve conditions where treatment options are currently limited. Edwards Lifesciences is focused on expanding access, building clinical evidence, and training healthcare professionals, a strategy that is expected to drive sustained growth, similar to its success in the TAVR market. Focusing on the Structural Heart Business, Edwards Lifesciences’ recent strategic moves, including the spin-off of its Critical Care segment and targeted acquisitions, underscore its commitment to concentrating on the structural heart market, its core area of strength. By divesting the Critical Care business to Becton, Dickinson and Company for $4,2 billion, Edwards Lifesciences is able to focus its resources on the faster-growing structural heart segment, thereby accelerating overall growth and increasing operational agility. The proceeds from the sale are being reinvested into strategic acquisitions, such as JenaValve and Endotronix, which expand Edwards Lifesciences' capabilities into new areas like aortic rehabilitation and heart failure management. These acquisitions bring innovative technologies that address significant unmet medical needs, thereby enhancing Edwards Lifesciences' product portfolio and strengthening its market position. By concentrating exclusively on structural heart disease, Edwards Lifesciences is better positioned to innovate, lead the market, and drive sustainable growth. Leveraging its expertise in transcatheter therapies, the company aims to serve a larger patient population with advanced, life-saving treatments.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 2,30, which is from 2023. I have selected a projected future EPS growth rate of 13%. Finbox expects EPS to grow by 13,2% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 26, which is twice the growth rate. This decision is based on the Edwards Lifesciences' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $50,18. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Edwards Lifesciences at a price of $25,09 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 528, and capital expenditures were 277. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 194 in our calculations. The tax provision was 199. We have 602,3 outstanding shares. Hence, the calculation will be as follows: (528 – 194 + 199) / 602,3 x 10 = $8,85 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Edwards Lifesciences' Free Cash Flow Per Share at $1,06 and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is $15,28.
I believe that Edwards Lifesciences is a strong company with a significant competitive advantage as a market leader. Although the management is relatively new, which introduces some uncertainties regarding their capabilities, I am inclined to give them the benefit of the doubt. Edwards Lifesciences has consistently delivered a high return on invested capital (ROIC) every year; however, free cash flow has declined to its lowest level in seven years due to increased investment activities. Encouragingly, free cash flow is expected to grow in 2024. Competition presents a key risk for Edwards Lifesciences, particularly with the introduction of new products such as Abbott's TriClip, which threatens its market share and growth. If Edwards Lifesciences cannot keep pace with technological advancements or demonstrate cost-effectiveness, it risks losing ground to competitors. Additionally, changes in legislation and regulatory requirements pose risks to Edwards Lifesciences, as they can directly impact product demand, market access, pricing, and financial performance, potentially resulting in revenue loss, higher costs, and operational disruptions. The company’s reliance on third-party suppliers is another risk, as any supply chain disruptions could lead to delays, increased costs, and product shortages, adversely affecting its operations and financial performance. Despite these risks, Edwards Lifesciences remains a potential investment opportunity due to its leadership position in the growing TAVR market, which is driven by innovative products, expanding patient reach, and strong international growth prospects. The TMTT segment also offers significant growth potential with new treatments and recent approvals, enabling the company to reach a broader patient base and maintain its leadership in the heart valve market. Moreover, Edwards Lifesciences’ decision to spin off its Critical Care segment and focus on recent acquisitions allows the company to concentrate fully on its core strength in the structural heart market. This strategy enhances growth potential by directing resources toward innovative heart therapies and expanding its offerings into new areas. Given these considerations, I see many favorable aspects in Edwards Lifesciences and will consider adding the company to the portfolio at a price below the intrinsic value of the Margin of Safety price of $50.
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