Edwards Lifesciences: A Market Leader with a Bright Future.
Opdateret: 7. aug.
Edwards Lifesciences is one of the few companies in the past 20 years that has never experienced a single year of negative EPS growth. As a result, it has been a great performer, rewarding its investors with a 620% gain over the past decade. Edwards Lifesciences is good at what they do, which has led to a dominating 63,9% market share. But does the future look as good as the past? It is something I will investigate in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
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.
Edwards Lifesciences was founded in California, USA in 1958. It is an American medical company that holds the position of global market leader in patient-focused medical innovations for structural heart disease, critical care, and surgical monitoring. The company is particularly renowned for its artificial heart valves. They have four operating segments. The largest is Transcatheter Aortic Valve Replacement (TAVR), which develops therapies designed for the nonsurgical replacement of heart valves. TVAR contributed 65% of net sales in 2022. The second largest segment is Surgical Structural Heart (Surgical), which focuses on surgical solutions for structural heart issues. Surgical contributed 17% of net sales in 2022. The third largest segment is Critical Care, which focuses on solutions for hemodynamic monitoring. Critical Care contributed 16% of net sales in 2022. The final segment is Transcatheter Mitral and Tricuspid Therapies (TMTT), which develops therapies for mitral and tricuspid diseases. TMTT contributed 2% of net sales in 2022. Edwards Lifesciences makes 58% of its sales in the United States, 22% in Europe, 9% in Japan, and 11% from the rest of the world. Edwards Lifesciences has a strong moat, both through its patents and the presence of switching costs. Healthcare professionals cannot easily switch from one product to another, as it requires significant practice to become familiar with a new product.
Their CEO is Bernard J. Zovighian. He joined Edwards Lifesciences in 2015 and became the CEO in 2023. Prior to joining Edwards Lifesciences, he held roles with increasing levels of responsibility at Johnson & Johnson. He has dual master's degrees in science and business from the Universities of Marseille, France. As a new CEO, he has mentioned that his focus is on fostering and maintaining the unique culture of Edwards Lifesciences, supporting employee career development, establishing trusted partnerships, addressing unmet patient needs, and transforming care. In a recent earnings call, Bernard J. Zovighian expressed confidence in Edwards Lifesciences' long-term strategy and pipeline of innovative therapies. He stated that the company will create significant value for patients and healthcare systems, leading to strong organic sales growth. He also mentioned that he is confident that if Edwards Lifesciences delivers on their strategy, they will create exceptional shareholder value. We cannot judge Bernard J. Zovighian yet, but he has vast experience in the sector and within the company as well. Finally, it seems like he is focused on shareholders, which is always nice to know. Thus, I will give him the benefit of the doubt and be excited to see how he will execute in the next few years.
I believe that Edwards Lifesciences has a strong brand moat. However, I believe that there are some uncertainties regarding the management due to its novelty. Now let us investigate the numbers to see if Edwards Lifesciences lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. These numbers are certainly encouraging, as Edwards Lifesciences has consistently delivered a return on invested capital (ROIC) well above 10% every year for the past ten years. Furthermore, the Return on Invested Capital (ROIC) has been above 20% every year since 2015, with the exception of the pandemic year in 2020. Few companies have delivered a return on invested capital (ROIC) like Edwards Lifesciences. It is encouraging to see that Edwards Lifesciences managed to achieve their second-highest return on invested capital (ROIC) in the last ten years in 2022, despite the challenges of the year. These numbers are impressive, and as an investor, I would be delighted to see such strong figures.
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 managed to consistently grow their equity up until 2022, where it experienced a slight decrease. 2022 was a challenging year for most businesses, so it isn't something that worries me. If I were investing in Edwards Lifesciences, I would be happy to see numbers like these.
Finally, we will investigate 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. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use margins to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. It is not surprising to see that Edwards Lifesciences has consistently generated positive free cash flow every year. Free cash flow has been somewhat inconsistent, but the levered free cash flow margin has consistently remained high, exceeding 15% in all years except for the pandemic year in 2020. Free cash flow yield indicates that Edwards Lifesciences isn't trading at a cheap price, but I will discuss this further in the analysis.
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on Edwards Lifesciences, I found that the company has 0,39 years of earnings in debt. It is well below the 3-year requirement, so debt is not something that I worry about.
Based on my findings thus far, I believe that Edwards Lifesciences is an interesting company. However, no investment is without risk, and Edwards Lifesciences also has its fair share of risks. One risk is competition. In their annual report, Edwards Lifesciences mentions that the medical technology industry is highly competitive. They compete with divisions of large companies as well as smaller companies. They mention that their area of competition is characterized by new product development and technical change. Thus, their present or future products could become obsolete or uneconomical due to technological advancements made by their competitors. Some of their largest competitors are Abbott Laboratories and Medtronic. Health care staffing. Edwards Lifesciences has mentioned that the lack of staffing in healthcare has resulted in a decrease in procedures, leading to a decrease in demand for their products. It could become a larger problem in the future, as the working population in important markets is expected to decline. Thus, while health staffing is improving post-pandemic, it could become a long-term issue that may result in a slowdown in sales in the future. A strong dollar. While the value of the U.S. dollar has decreased recently, it remains relatively strong when compared to other currencies. As Edwards Lifesciences generates 42% of its income outside of the United States, a continued strong dollar could affect the company's bottom line, as it did in the first quarter of 2023. During that period, foreign exchange rates had a 70 basis point impact on the gross profit margin compared to the previous year. Thus, if the dollar continues to be strong for a significant time, it will hurt the bottom line of Edwards Lifesciences.
Edwards Lifesciences also has a lot of growth potential. A larger addressable market. Edwards Lifesciences believes that its market will double by 2028. Currently, the market is valued at around $10 billion as of the end of 2022, and it is projected to reach approximately $20 billion by the end of 2028. And while many companies often overestimate their addressable market, I believe that there are trends that support the notion of Edwards Lifesciences. One trend is that the world population is aging. The World Health Organization expects that the global population aged 60 years and older will increase from 12% in 2015 to 22% in 2050, representing a significant growth. I believe that Edwards Lifesciences will be able to take advantage of this opportunity, as they hold a market-leading position with a strong competitive advantage. Furthermore, the industry has high regulatory and research and development barriers that will protect it from new companies. I appreciate that Edwards Lifesciences sets itself apart from many of its competitors in the industry by remaining dedicated to organic growth within their core business, rather than pursuing diversification or acquisitions like many of their competitors. Share buybacks. Edwards Lifesciences seems to buy back shares when they are trading at lower multiples. In the first quarter of 2023, Edwards Lifesciences significantly increased their share buyback program. They repurchased 5 million shares valued at $611 million, leaving them with $650 million remaining under their current share buyback authorization. While Edwards Lifesciences isn't known for their share buybacks, they have still managed to buy back 6% of their shares since 2016. They seem to do so when the shares are trading at lower prices.
Now it is time to calculate the price of Edward Lifesciences shares. I perform three different calculations that I learned at a Phil Town seminar. 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 2.44, which is from 2022. I have selected a projected future EPS growth rate of 12% (management anticipates low double-digit EPS growth), a projected future PE ratio of 24 (which is twice the growth rate, considering that Edwards Lifesciences has historically had a higher PE ratio), and we already have a minimum acceptable rate of return of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $44,96. 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 $22,48 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The Operating Cash Flow last year was 1.239 capital expenditures were $254. I tried to review their annual report to determine the portion of the capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use $178 in our calculations. The tax provision was $241. We have 606 outstanding shares. Hence, the calculation will be as follows: (1.239 – 178 + 241) / 606 x 10 = $21,49 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 $1,66 and a growth rate of 12%, if you want your purchase to be paid back in 8 years, the Payback Time price is $22,87 .
I believe that Edwards Lifesciences is a great company. They are a market leader and have a significant competitive advantage. Management is new, so there are some uncertainties regarding their abilities. However, I will give them the benefit of the doubt. Edwards Lifesciences faces some short-term risks, such as the impact of a strong dollar on its bottom line. However, it is hard to believe that the dollar will stay elevated as it has been lately. Competition and staffing issues in the healthcare sector could pose longer-term risks that will require ongoing monitoring. I believe that Edwards Lifesciences has great potential for growth moving forward, as the world's population is aging. I am confident that they will reach a $20 billion market by 2028. I really appreciate that Edwards Lifesciences prioritizes their core competencies and avoids diversification. Their expertise is their strength, and as long as they focus on that, I believe they will do great. Personally, I believe that Edwards Lifesciences has the traits of being a long-term compounder, and I would love to add the company to my portfolio. Unfortunately, they have always been trading at a premium, and I doubt that they will reach $45,74, which is the highest intrinsic value price based on any of my calculations (double the Payback Time price). However, if Edwards Lifesciences reaches $45,74 or if their earnings grow faster than their share price, I would love to buy it.
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