In the spring of last year, I called Edwards Lifesciences Corporation (NYSE:EW) a solid, yet not too spectacular performer. The company had seen a very solid year, while its current growth prospects were very solid. This looked quite compelling, although Edwards sold its Critical Care business a bit on the cheap, in my belief.
All in all, I am quite upbeat on Edwards Lifesciences Corporation, regarding the company to be top quality, but the issue is that of high valuations here, although quality should prevail with the passage of time.
A Heart Business
Edward Lifesciences focuses on the heart, with a portfolio of heart valve systems and repair products for defective valves, applies in surgical and transcathether therapies. This is badly needed as one person dies every 33 seconds from cardiovascular diseases in the US, a heartbreaking statistic.
Just a billion-dollar business in the mid-2000s, the company has grown to a $5 billion revenue base in 2021. On top of five-folding its sales, the company has grown operating margins to their 30s, resulting in adjusted earnings of $2.22 per share in 2021.
Shares have seen incredible momentum as a $1 stock in the early 2000s rose to the $10 mark in 2010, with shares peaking at $130 in 2021. Some 631 million shares outstanding, granted the business an $82 billion valuation at the time. This valued operations at about 15 times sales and 60 times earnings, both nosebleed valuation multiples.
The company guided for 2022 sales to grow towards $5.5-$6.0 billion, with earnings initially seen between $2.50 and $2.65 per share. Amidst softer operating performance, the company trimmed the guidance for 2022 during the year as shares fell to the $70 mark in the fall of 2022.
Shares recovered to the $80 mark in March of last year, after long-time and well-regarded CEO Mr. Mussallem announced his retirement. Shares were furthermore supported by substantial and accelerated buyback programs, supported by a strong net cash position. In the end, the company grew 2022 sales by just 3% to $5.38 billion, held back by a strong dollar, with adjusted earnings reported up twenty-six cents to $2.48 per share. For 2023, the company guided for stagnant earnings of $2.45-$2.60 per share, while guiding for solid top-line sales growth.
Regarding Edwards as top-notch quality, I believed that quality should prevail in the long haul, despite the small (or even non-existing) gap of the earnings yield in relation to risk-free interest rates. Having held a small position at the time, I concluded to hold on to this stake, anticipating further growth and re-rating over time.
Struggling
Since March of last year, a $90 stock early in the summer fell to lows in the $60s in the fall, having rebounded to $91 at this point.
In February of this year, Edwards posted its 2023 results, a year in which revenues were up 13% to $6.0 billion. Growth was driven by all regions, with US sales up by similar percentages to $3.5 billion, with the international operations growing at a similar pace, with revenues notably generated in Europe, and to a lesser extent Japan and the rest of the world.
Two thirds of these sales were generated from the transcathether aortic valve replacement business, about a sixth from surgical structural heart and just over $900 million from critical care. The fourth segment was the smallest, yet a near $200 million transcatheter mitral and tricuspid therapies (TMTT) business saw impressive 70% growth rates.
While this looked very solid, the issue is that adjusted earnings for the year were up just three cents to $2.51 per share, even aided by modest net share buybacks which totaled $867 million for all the year, heavily geared towards the fourth quarter. Lack of earnings per share progress came amidst some generic margin pressure, mostly tied to currency moves.
For the year 2024, the company guided for sales to advance some 8-10%, at least in terms of constant currency sales growth, with revenues seen at $6.3-$6.6 billion. The TMTT business is expected to be a big revenue contributor, with revenues seen to the higher end of the $320 million sales guidance for that segment. Moreover, the company guided for earnings to improve to $2.70-$2.80 per share, with earnings set to grow in line with the topline.
Solid Momentum
After a solid first quarter, Edwards guided for full-year sales to approach the high end of the guidance, with TMTT sales seen between $320 and $340 million this ear. This came after first quarter sales in this segment grew by 75% to $73 million, boding well for the overall business.
The 604 million shares now trade at $91 per share, for a $55 billion equity valuation, one which includes about one and a half billion in net cash, for a $53.5 billion enterprise valuation. This values the business at around 8 times sales and 32-33 times earnings multiple.
The company said it was on track to complete the spin-off of the Critical Care unit, as a formal announcement came early in June. The company reached a deal to sell the Critical Care unit to Becton, Dickinson and Company (BDX) in a $4.2 billion cash deal. At a 4.7 time sales multiple, it comes at a meaningful discount compared to the overall valuation, although that the unit is a non-core asset, seeing lower margins and slower growth prospects.
The purchase price is equal to about $7 per share, although that the company indicated that proceeds would be used to fund strategic growth investments. This helps the business to enable a world in which heart patients are diagnosed earlier, treated routinely, live longer and have better quality of life, with fewer hospitalizations.
Comforting to investors is that the estimated impact to adjusted earnings per share in 2024 is anticipated to be immaterial, but as the deal is only set to close towards the end of the year, that might now say that much.
What Now?
With a 10% return over the past year, shares of Edwards have been lagging the market, but the company has been doing well over the past year. Top-line sales growth was not accompanied by earnings growth in 2023, but that is set to change in 2024.
With solid top-line sales momentum seen, I am a bit underwhelmed by the sale of the Critical Care business, but the improved focus might help the company after all. Trading at a rich multiple around 8 times sales and a low thirty times earnings multiple, expectations are elevated, but so is the operating performance.
Given all this, I am convinced that Edwards is high quality and that quality prevails over time, making me stick to a modest long position.