Company Overview: Edwards Lifesciences Corporation (NYSE: EW) is headquartered in Irvine, California. The company deals in products and technologies targeted at curing advanced cardiovascular diseases in critically unwell patients. The company is also one of the top players in hemodynamic monitoring systems, which is utilized to measure a patient's cardiovascular function in the hospital setting.

EW Details

Robust Product Adoption & Customer Additions Aid EW:  Edwards Lifesciences Corporation (NYSE: EW) is one of the leading companies involved in focusing patient medical innovations for structural heart disease and serious care supervising. It is engaged in manufacturing of tissue heart valves and repair products, which are utilized to repair or replace patient's diseased or faulty heart valve. The company’s products and technologies are grouped into four key sections namely (1) Transcatheter Aortic Valve Replacement (TAVR), (2) Transcatheter Mitral and Tricuspid Therapies (TMTT), (3) Surgical Structural Heart, and (4) Critical Care. Despite COVID-19 led uncertainties, the company remains positive regarding the strong customer adoption of the TruWave disposable pressure monitoring devices. Further, the company is also optimistic regarding the demand for products used in cardiac surgeries, owing to the resumption of treatment in hospitals of non-COVID beings. These positives are likely to aid the financial performance of the company, going forward.

Looking at the past performance over the period of FY10-FY20, the company reported a CAGR of ~12.1% in total sales, with continuous upward progress. The below trend has been strongly backed by robust demand for heart valve surgery, strong adoption of the SAPIEN 3 Ultra platform along with positive cash flow from operations.

Key Trend (Source: Company Reports)

The company’s Surgical Structural Heart Group area is likely to see an upturn in business, as EW is witnessing recovery in surgical case volumes over the past few months. Further, patient’s willingness to obtain heart valve surgery and the hospitals being able to handle medical patient flow are few other positives. Coming to the TAVR arm, the company is likely to record improved worldwide sales on the back of strong adoption of the SAPIEN valve platform as well as recovery in procedure volumes. Strong customer adoption drives the momentum of the SAPIEN 3 Ultra platform. This, along with favorable clinician reaction on enhanced paravalvular leak implementation of the SAPIEN 3 Ultra, is expected to aid the top-line results, going forward. Despite pandemic related issues, robust adoption of TAVR outside the US is also expected to positively impact financial results.

4QFY20 Key Highlights: During the quarter, the company reported adjusted earnings per share of 50 cents, which went up 2% from the prior corresponding period. EPS on a GAAP basis increased ~11.4% year over year and came in at 44 cents per share. Net sales for 4QFY20 stood at $1.19 billion, depicting an increase of 1.5% on pcp. The rise in top-line can mainly be attributed to the continued adoption of EW’s life-saving technologies all over the world. Gross profit during the quarter came in at $895.4 million, up a marginal 0.8% year over year. Adjusted gross margin contracted 50 bps on a year over year basis, owing to negative impact of foreign exchange and expenses incurred associated with reacting to COVID-19. Operating income in 4QFY20 stood at $351.4 million, up from $310.8 million reported in the year-ago quarter.

4QFY20 Key Highlights (Source: Company Reports)

Segmental Highlights: Revenues from global sales in the TAVR product group went up by 1.8% year over year and came in at $776.2 million. In 4QFY20, sales from TMTT stood at $13.1 million, skyrocketing 83.6% on pcp. The company remained on track to gain from robust adoption of the PASCAL leaflet repair system in Europe. Sales from Surgical Structural Heart segment during the quarter decreased slightly by 0.5% and stood at $204.2 million, owing to increased number inflow of COVID-19 patients in hospitals, thus restricting surgical valve procedures. Lastly, sales from Critical Care stood at $198.2 million during the quarter, marginally down by 0.6% on a year over year basis, due to a decline in HemoSphere orders in the United States. However, strong sales of TruWave disposable pressure monitoring devices used in the ICU in the United States and Europe were key positives.

Segmental Details (Source: Company Reports)

Key Metrics, Liquidity & Balance Sheet Details: The company exited the FY20 with a cash balance of $1.183 billion, up from the prior year figure of $1.179 billion. Long-term debt at the end of the period came in at just $595 million. Net cash flow from operating activities in FY20 stood at $400 million, up from $399 million reported in the year-ago period. Capital expenditure came in at $113 million in FY20, up from $71 million reported in FY19. We opine that an increase in cash flow will facilitate it to pay off debt commitments as well as it will provide higher compensation to shareholders.

In FY20, Gross, operating, EBITDA and net margins stood at 75.4%, 20.5%, 32.2% and 18.8%, higher than the industry median of 66.1%, 6%, 12.8% and 0.0%, respectively. In FY20, ROE stood at 18.9%, higher than the industry median of 0.9%. Debt to equity multiple in the same time span stood at 0.13x, lower than the FY19 figure of 0.14x.

Profitability and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 33.34% of the total shareholdings while the top 4 constitutes the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 7.76% and 5.35%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Risk Analysis: The company expects a decline in HemoSphere orders from hospitals in the US, owing to COVID-19 led uncertainties. This, in turn, has limited capital spending, which is likely to weigh on the top-line. Moreover, gross margin contraction also does not augur well for EW. This, along with stiff competition in the cardiac devices market, adds to the woes. EW’s business, financial, and operating conditions highly depends on general economic conditions and spending powers of customers. If such circumstances worsen, it may negatively impact the overall financial performance of the company.

Outlook: For 1QFY21, the company expects adjusted EPS to be in the ambit of 43-50 cents. Top-line in 1QFY21 is expected to be between $1.1-$1.2 billion. For FY21, the company expects adjusted EPS between $2-$2.20 and sales to be in the range of $4.9-$5.3 billion. The company remains optimistic regarding the robust adoption of the KONECT aortic valve conduit and the INSPIRIS aortic surgical valve. Further, the higher demand for SAPIEN 3 Ultra platform looks promising. Continuous progress in TAVR procedure volumes on a global basis buoy optimism. Further, the company expects to ride on strong adoption of TruWave along with operating margin expansion. Despite the uncertainties led by virus outbreak, the company anticipates recording underlying sales growth in high-single digits for its Surgical Structural Heart business in FY21.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, the stock went down by ~3.5%. The stock made a 52-week low and high of $64.77 and $92.08, respectively. On the technical analysis front, the stock has a support level of ~$78.89 and a resistance level of ~$88.36. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight premium as compared to its peer’s median, considering the higher demand of SAPIEN 3 Ultra platform, increase in cash flow, promising outlook, and decent 4QFY20 Key numbers. We have taken peers like ICU Medical Inc (NASDAQ: ICUI), ABIOMED Inc (NASDAQ: ABMD), to name a few. Considering the company’s decent 4QFY20 performance, geographical expansion, encouraging outlook, and liquidity position and valuation, we give a “Buy” recommendation on the stock at the closing price of $84.12, down by 1.51% on 7 April 2021.

EW Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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