This medical device maker’s stock has suffered unwarranted hits, making it an opportunistic buy. Analysts are forecasting double-digit growth for this company for the next couple of years.
Edwards Lifesciences Corporation (EW)
from Canaccord Genuity Research
Medtronic’s (MDT) FQ2 top-line miss this morning, impacted by disappointing US growth trends across multiple franchises, precipitated a pullback across the medical device market, with investors attempting to discern whether this is a MDT-specific issue or a more entrenched device market slowdown.
While we believe it’s a mix of both and dependent on the specific market (with multiple MDT headwinds stemming from product approval timelines looking to reverse over the next several quarters), as it relates to the transcatheter aortic valve replacement (TAVR) market, commentary from today’s call reaffirmed the stance we’ve highlighted for months (including subsequent to Edwards Lifesciences Corporation’s (EW) Q3 that precipitated the recent decline), namely that the US TAVR market is strong.
Further, and notwithstanding the “throw the baby out with the bathwater” mentality seemingly permeating device stocks these days, we are confident about multiple tailwinds supporting sustainable, 20%+ growth in the US TAVR market for at least the next few years, with EW continuing to lead the charge. Largely ignored by the Street today, Mike Coyle—president of the business unit that houses TAVR—said the US TAVR market growth was “quite strong,” with the worldwide market growing ~30% in the recent quarter.
While many investors remain focused on TAVR volume trends within the US, we would also highlight the Japanese market, which we view setting up to serve as a surprise growth driver for EW’s transcatheter aortic valve implantation (TAVI) business in 2017 and beyond. While the market has been slow to take off (arduous certification process for centers to be granted AVI privileges; reluctance from some centers to jump into the TAVI era given the potential to create “turf wars” between surgeons and interventional cardiologists), we think many of these “gating factors” are slowly being addressed in Japan. We estimate Japan will contribute ~$50M to EW’s outside US business this year, and we see the Japanese market likely growing to a $300-400M market opportunity over the longer term. If we assume EW can capture its current global market share (~60%) in Japan (which we view as highly likely), we see Japan driving $200M+ in annual TAVI revenue within a few years—over 4x our projected 2016 contribution.
While EW plans to eventually build a new manufacturing facility for TAVI production sometime over the long term, we think the EPS upside predicted by this model—especially in 2017, which is the basis for most investors’ valuation of the stock—has a relatively high probability of coming to fruition. To wit, this is the primary reason we remain bullish on this stock.
In 2017, our EPS estimate of $3.50 is already higher than the current consensus estimate of $3.43. This model predicts the potential at least another 7% upside to our number and 9% to the Street’s.
We firmly believe the pullback in EW is a severe overreaction and would be aggressive buyers of the stock at these levels. Investors are not only de-valuing strong, absolute TAVR fundamentals, in our view, but are also not fully appreciating the tremendous operating leverage potential on the P&L, which we think could play out in 2017 to generate another year of 20%+ EPS growth and upside to current consensus estimates. Reiterate BUY & $140 target.
Jason Mills and Cecilia Furlong, Canaccord Genuity Research, www.canaccordgenuity.com, 617-371-3711, November 22, 2016