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On January 10, we upgraded Edwards Lifesciences Corp. (EW - Analyst Report) to Neutral from Underperform based on its improved prospects for 2013 as disclosed in its latest guidance for the year.

Why the Upgrade?

Edwards Lifesciences faced a challenging third quarter with dismal performance in the international market, especially Europe. The lower transcatheter heart valve (THV) sale in the domestic market was a cause of concern with a delayed approval of Sapien in high risk patients adding to the burden. Despite the headwinds, the company witnessed year-over-year growth for top as well as bottom lines in the most recent quarter.  

While the recent results led to lower, dull outlook for 2012 for Edwards Lifesciences, we expect the company to turn the tables in 2013. Edwards Lifesciences also expects strong double-digit sales and earnings growth for 2013. Given that the company has delivered positive earnings surprises in the last four quarters with an average surprise of 5.5%, we are upbeat about its performance for the ongoing fiscal.

However, Edwards Lifesciences continues to battle the contagion of economic problems in Europe. Adding to the concern is the foreign exchange headwind. To overcome these challenges, the company plans to expand its foothold in other lucrative markets on the heels of product approvals.

While Edwards Lifesciences enjoys the first-mover advantage for some of its offerings, we note that FDA approval of competitors’ products has diluted sales in the past. Also worth mentioning in this context is the tough competitive landscape with the presence of larger players. We remain skeptical of similar advances in the future which might result in top-line challenges.

While the company is expected to return to normalized growth in 2013, the competitive headwinds and macroeconomic uncertainty keeps us on the sidelines. This is reflected in the nominal rise in the Zacks Consensus Estimate for 2013 over the last two months. Accordingly, the stock carries a Zacks Ranks #3 (Hold).

Meanwhile, other medical sector stocks worth a look are Intuitive Surgical (ISRG - Analyst Report) and Haemonetics (HAE - Analyst Report), each carrying a Zacks Rank #1 (Strong Buy).

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