EW Stock Study (8-8-24)

I recently did a stock study on Edwards Lifesciences Corp. (EW) with a closing price of $61.07.

M* writes:

     > Spun off from Baxter International in 2000, Edwards Lifesciences
     > designs, manufactures, and markets a range of medical devices
     > and equipment for advanced stages of structural heart disease.
     > It has established itself as a leader across key products,
     > including surgical tissue heart valves, transcatheter valve
     > technologies, surgical clips, and catheters. The firm derives
     > about 55% of its total sales from outside the US.

Over the last 10 years, the medium-size company has grown sales and EPS at annualized rates of 11.3% and 13.1%. Lines are mostly up, straight, and parallel except for EPS dips in ’15, ’20, and ’23. Five- and 10-year EPS R^2 are 0.55 and 0.72, respectively, and Value Line gives an impressive Earnings Predictability score of 100.

Over the last decade, PTPM leads peer and industry averages despite falling from 49.2% (’14) to 26.6% (’23) with a last-5-year mean of 27.9%. ROE leads peer and industry averages despite falling from 39.5% (’14) to 20.8% (’23) with a last-5-year mean of 23.6%. To complete the trifecta, Debt-to-Capital is much lower than peer and industry averages while falling from 21.4% (’14) to 9.5% (’23) with a last-5-year mean of 11.6%.

Quick Ratio is 2.3 and Interest Coverage is NMF (interest income exceeds interest expense) per M* who rates the company “Exemplary” for Capital Allocation and awards a “Narrow” economic moat. Value Line gives a B++ grade for Financial Strength.

With regard to sales growth:

• YF projects YOY 5.9% and 3.1% for ’24 and ’25, respectively (based on 29 analysts).
• Zacks projects YOY 7.3% and 3.8% for ’24 and ’25, respectively (12 analysts).
• Value Line projects 7.9% annualized growth from ’23-’28.
• CFRA projects 6.9% YOY and 6.2% per year for ’24 and ’23-’25, respectively.
• M* offers a 2-year ACE of 5.0% per year.

My 3.0% per year forecast is below the range.

With regard to EPS growth:

• MarketWatch projects 11.1% and 11.3% per year for ’23-’25 and ’23-’26, respectively (based on 33 analysts).
• Nasdaq.com projects 8.7% and 7.3% per year for ’24-’26 and ’24-’27, respectively (13/13/3 analysts for ’24/’26/’27).
• Seeking Alpha projects 4-year annualized growth of 11.1%.
• YF projects YOY 7.2% and 5.2% for ’24 and ’25, respectively (29), along with 5-year annualized growth of 9.3%.
• Zacks projects YOY 8.0% and 3.7% for ’24 and ’25, respectively (13), along with 5-year annualized growth of 8.9%.
• Value Line projects 9.8% annualized growth from ’23-’28.
• CFRA projects 8.4% YOY and 5.8% per year for ’24 and ’23-’25, respectively, along with a 3-year CAGR of 9.0%.
• M* projects long-term growth of 7.4% per year.

My 7.0% per year forecast is below the long-term-estimate range (mean of five: 9.3%). Initial value is ’23 EPS of $2.30/share rather than 2024 Q2 $2.43 (annualized).

My Forecast High P/E is 35.0. Over the past decade, high P/E increases from 17.9 (’14) to 41.2 (’23) with a last-5-year mean (excluding 70.8 in ’20) of 50.1 and a last-5-year-mean average P/E (also excluding ’20 low P/E) of 39.5. I am forecasting the lowest value since ’14.

My Forecast Low P/E is 20.0. Over the past decade, low P/E increases from 8.4 (’14) to 26.3 (’23) with a last-5-year mean (excluding 39.6 in ’20) of 28.8. I am forecasting the lowest value since ’14.

My Low Stock Price Forecast (LSPF) of $48.60 is default based on initial value given above. This is 20.4% less than the previous close and 17.5% less than the 52-week high.

These inputs land EW in the BUY zone with a U/D ratio of 4.2. Total Annualized Return (TAR) is 13.1%.

PAR (using Forecast Average—not High—P/E) of 7.8% is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 136 studies done in the past 90 days (my study and 52 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 9.0%, 9.6%, 40.6, and 29.1, respectively. I am lower across the board. Value Line projects a future average annual P/E of 30.0 that is less than MS (34.9) but greater than mine (27.5).

MS high / low EPS are $3.78 / $2.32 versus my $3.23 / $2.43 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $4.00 is greater than both.

MS LSPF of $64.20 implies a Forecast Low P/E of 27.7 versus the above-stated 29.1. While more conservative than default, only 41 of 136 studies are done since the stock drops 31% on 7/25/24. As a result, default LSPF is currently INVALID. MY LSPF fully accounts for the drop and is 24.3% lower.

MOS is robust because my inputs are near or below respective analyst/historical ranges and MS inputs. Further substantiation is MS TAR 13.6% that is 0.5%/year greater than mine despite only fractionally factoring in the stock price crash.

Pertaining to valuation, PEG is 2.6 and 3.4 per Zacks and my projected P/E, respectively: both regarded as rich. On the other hand, relative Value [(current P/E) / 5-year-mean average P/E] is quite cheap at 0.64.

Per U/D, EW is a BUY under $64. BI TAR criterion is met ~ $57/share given a forecast high price of $113.

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