Edwards Lifesciences (EW): A Significantly Undervalued Gem?
Edwards Lifesciences Corp (NYSE:EW) recently recorded a daily loss of 2.65% and a 3-month loss of 11.91% with an Earnings Per Share (EPS) of 2.26. This raises the question: is the stock significantly undervalued? In this article, we aim to provide a comprehensive valuation analysis of Edwards Lifesciences to answer this question. Let's delve into the financials and operations of the company to uncover its intrinsic value.
A Brief Overview of Edwards Lifesciences
Edwards Lifesciences Corp (NYSE:EW), a spin-off from Baxter International in 2000, is a leading player in the medical devices and equipment industry. The company designs, manufactures, and markets a broad range of products for advanced stages of structural heart disease. Its key offerings include surgical tissue heart valves, transcatheter valve technologies, surgical clips, catheters, and monitoring systems used to measure a patient's heart function during surgery. Approximately 55% of its total sales are derived from outside the U.S.
With a market cap of $45 billion and sales of $5.70 billion, Edwards Lifesciences' stock is currently trading at $74.07 per share. This is significantly lower than its Fair Value (GF Value) of $114.02, indicating that the stock might be undervalued.
Understanding the GF Value
The GF Value is a proprietary measure that reflects the current intrinsic value of a stock. It's derived from historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value that the stock should ideally trade at.
Edwards Lifesciences (NYSE:EW) appears to be significantly undervalued according to the GF Value. The stock's fair value is estimated based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns.
Given that Edwards Lifesciences is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Link: These companies may deliver higher future returns at reduced risk.
Assessing Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial for investors to carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can provide a good initial perspective on the company's financial strength.
Edwards Lifesciences has a cash-to-debt ratio of 2.21, which ranks worse than 50.66% of 835 companies in the Medical Devices & Instruments industry. Based on this, GuruFocus ranks Edwards Lifesciences's financial strength as 8 out of 10, suggesting a strong balance sheet.
Evaluating Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Edwards Lifesciences has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $5.70 billion and Earnings Per Share (EPS) of $2.26. Its operating margin is 31.51%, which ranks better than 94.67% of 825 companies in the Medical Devices & Instruments industry. Overall, the profitability of Edwards Lifesciences is ranked 10 out of 10, indicating strong profitability.
Growth is probably one of the most important factors in the valuation of a company. Edwards Lifesciences's 3-year average revenue growth rate is better than 52.14% of 725 companies in the Medical Devices & Instruments industry. Edwards Lifesciences's 3-year average EBITDA growth rate is 15.5%, which ranks better than 59.95% of 729 companies in the Medical Devices & Instruments industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Edwards Lifesciences's return on invested capital is 23.95, and its cost of capital is 10.59.
Conclusion
In conclusion, the stock of Edwards Lifesciences appears to be significantly undervalued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 59.95% of 729 companies in the Medical Devices & Instruments industry. If you're interested in learning more about Edwards Lifesciences stock, you can check out its 30-Year Financials here.
To find out the high-quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.
