Senior Portfolio Manger Jason Benowitz of Roosevelt Investments says the risk/reward for Edwards Lifesciences Corp (NYSE:EW) is favorable, and the company could grow revenues by 10% and earnings by 20% annually over the next two years.
Edwards is the number-one manufacturer of heart valves and hemodynamic monitoring systems. Its largest product line is transcatheter heart valves, where the median patient age is 82. So it stands to benefit nicely from the outsized population growth in that age cohort.
Today, Edwards trades at $94, down from $121 in October. The chief investor concern is a slowing of the key transcatheter aortic valve replacement — TAVR — market. Additional concerns are the competitive environment where Edwards’ leading market share is expected to erode and an intellectual property dispute with Boston Scientific (NYSE:BSX) after a German court found on March 9 that both firms are infringing each other, with each side expected to appeal.
We believe the recent slowing of the TAVR market is due to seasonality and typical choppiness that has been evident for years, as well as a temporary reimbursement issue in France that has since been addressed. That is the opinion of many doctors at various industry conferences over the last six months, as well as the management team at both Edwards and its largest competitor Medtronic (NYSE:MDT).
We think Edwards can grow revenues at 10% and earnings at 20% annually over the next two years, to drive $4 of earnings power in 2018, which we would value at 30 times price to earnings ratio to arrive at $120 target price or 27% upside by year-end. In a bear scenario, Edwards might only earn $3.50, which we would value at 24 times p/e for $84 or 11% downside. Thirty times is a 70% premium to the market multiple, which is below the stock’s five-year median premium of 90%. So we think the risk/reward is favorable at the current level.
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