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On Aug 29, 2013, we upgraded our long-term recommendation on Edwards Lifesciences Corporation (EW - Analyst Report) to Neutral following stronger second-quarter 2013 results. This medical device company carries a Zacks Rank #3 (Hold).

Why the Upgrade?

After a disappointing start to 2013, Edwards reported improved second-quarter results on Jul 25. Adjusted EPS grew 22.4% year over year to 82 cents, higher than the Zacks Consensus Estimate of 76 cents and company’s guided range of 75–79 cents. Sales rose 7.3% (up 10.3% at constant exchange rate or CER) to $517.2 million, better than the Zacks Consensus Estimate of $514 million.

Growth of the Surgical Heart Valve Therapy Group and Transcatheter Heart Valves (THV) group boost confidence. Edwards also reported meaningful margin expansion in the quarter. Contrary to last few quarters, performance in Southern Europe, especially for the THV franchise was encouraging.

The recent injunction against Medtronic’s (MDT - Analyst Report) CoreValve in Germany is a material upside for Edwards as it is likely to bolster sales in the region.

The regulatory approval and reimbursement of Sapien XT in the high-focus Japanese market is a major positive. It makes Sapien XT the foremost commercially available transcatheter aortic heart valve in Japan, reflecting a major boost for Edwards. Additionally, the untapped potential of emerging markets represents another high-growth avenue.
On the flip side, Critical Care business recorded another quarter of poor performance as distributor inventory problems in China remain a cause of concern. Additionally, we are wary of considering second-quarter sales improvement in Southern Europe as a sustainable trend.

Edwards is also susceptible to currency headwinds. The weakening of the Japanese yen had an adverse effect on all three operating platforms in the first half of 2013. Adverse currency movements are likely to drag 2013 sales by $55 million. Furthermore, competitive landscape remains tough.

Other Stocks to Consider

While we remain on the sidelines for Edwards, medical stocks such as Alere Inc. (ALR - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy) and LeMaitre Vascular, Inc. (LMAT - Snapshot Report), carrying a Zacks Rank #2 (Buy) warrant a look.

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