Will Edwards Lifesciences Stock Surge 2x To Its Pre-Inflation Shock Highs?

Edwards Lifesciences (NYSE: EW), a medical technology company specializing in artificial heart valves, currently trades at $67 per share, about 50% lower than the peak level of $131 seen in December 2021. EW has fared much worse than its peer – Medtronic stock (NYSE: MDT) – down 7% over this period. EW stock has been weighed down after its downbeat outlook for Q3. EW saw its stock trading at around $95 in June 2022, just before the Fed started increasing rates, and it’s still trading 30% below those levels. This compares with 51% gains for the S&P 500 index over this period.

The decrease in EW stock over the recent years has been far from consistent, with annual returns being appreciably more volatile than the S&P 500. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and uncertain geopolitical environment, could EW stock underperform the S&P over the next 12 months — or will it see a recovery? Returning to the pre-inflation shock level of $131 implies that EW stock will have to gain around 2x from here, and we don’t think that will materialize anytime soon. We do think EW stock has some room for growth. It currently trades at 6.7x trailing revenues, compared to its average P/S ratio of 10.3x over the last three years. Notably, the $77 average of analysts price estimate reflects around 15% upside from here.

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

• 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.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P 500 recoup some of its losses.
• August 2023 – August 2024: Fed has kept interest rates unchanged to quell fears of a recession and keep inflation in check
• September 2023: Fed cut rates by 50 bps and pointed to more rate cuts going forward

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 $5.2 billion in 2021 to $6.2 billion in 2023, led by its TAVR heart valve products. The company’s operating margin decreased from 30.3% to 28.8% over the same period. Its earnings per share stood at $2.30 in 2023, compared to the $2.38 figure in 2021.

Edwards Lifesciences is going through a major restructuring. It has entered into an agreement to acquire JenaValve Technology, a pioneer in the transcatheter treatment of aortic regurgitation (AR). Also, it has exercised its option to acquire Endotronix, a company focused on heart failure management solutions. These acquisitions will cost the company around $1.2 billion, plus up to $445 million in additional milestone payments. ^[1] Furthermore, the company has recently divested its Critical Care business for $4.2 billion in an all-cash transaction. The company will use the net proceeds from the sale to fund the above acquisitions and share repurchases. With this restructuring, Edwards Lifesciences will now be focused on its cardiovascular business.

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

Edwards Lifesciences’ total debt has been around $700 million in recent years, while its cash is around $2.0 billion. The company also garnered $866 million in cash flows from operations in the last twelve months. It will also get a $4.2 billion infusion from the sale of its Critical Care business. 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 Edwards Lifesciences (EW) stock has the potential for some 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.

While EW stock has room for some gains, check out how Edwards Lifesciences’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/23/2024
[2] Cumulative total returns since the end of 2016

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1. Edwards Lifesciences Press Release, July 24, 2024 [↩]