Will Edwards Lifesciences Stock Recover To Its Pre-Inflation Shock Highs Of $130?

Edwards Lifesciences
EW
(NYSE: EW), a medical technology company specializing in artificial heart valves, currently trades at $76 per share, about 10% lower than the level seen in March 2021, and it can see higher levels over time. EW stock was trading at around $95 in early June 2022, just before the Fed started increasing rates, and is now 20% below that level, compared to 16% gains for the S&P 500 during this period. This underperformance of EW stock can be attributed to its slower-than-expected sales growth for its transcatheter aortic valve replacement business. Also, investors still have concerns about a potential recession despite a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan.

We note that EW stock has had a Sharpe Ratio of 0.5 since early 2017, close to 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Returning to the pre-inflation shock level of about $130 means that EW stock will have to gain more than 70% from here, and we don’t think this will materialize anytime soon. That said, there is upside potential from its current levels. EW stock is trading at 8x revenues, compared to levels of around 12x in 2019, before the pandemic. Our Edwards Lifesciences Valuation Ratios Comparison dashboard has more details.

EW stock enjoyed a higher valuation multiple before the pandemic. However, with TAVR sales growth falling short of expectations, partly due to hospital staffing shortages seen in the recent past, a slight decline in the valuation multiple is justified. The company reported revenue per share of $9.25 for the last twelve months, and its last three-year average P/S multiple is around 10x, implying a valuation of $92 and over 20% upside from its current levels.

Our detailed analysis of Edwards Lifesciences upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how EW stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

EW and S&P 500 Performance During 2007-08 Crisis

EW stock saw a marginal decline of 5% between August 2008 (pre-crisis peak for EW) and March 2009 (as the markets bottomed out). It surged post the 2008 crisis to levels of around $7 in early 2010, rising about 55% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

EW Fundamentals Over Recent Years

Edwards Lifesciences revenue rose from $4.3 billion in 2019 to $5.4 billion in 2022, led by its TAVR products, primarily the Edwards SAPIEN platform. The company’s operating margin increased from 26.4% in 2019 to 33.4% in 2022. Our Edwards Lifesciences Operating Income Comparison dashboard has more details. Its earnings per share stood at $2.46 in 2022, compared to the $1.68 figure in 2019.

Does EW Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Edwards Lifesciences’ total debt has been around $600 million in recent years, while its cash is around $1.2 billion. The company also garnered $1.2 billion in cash flows from operations in 2022. Given that Edwards Lifesciences is net debt negative, it is in an excellent position to service its near-term debt obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe EW stock has the potential for gains once fears of a potential recession are allayed. That said, a slowdown in TAVR sales growth remains a risk factor to realizing these gains.

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