Still Neutral on Edwards

On Mar 4, 2013, we reiterated our Neutral recommendation on Edwards Lifesciences (EW - Analyst Report) following the fourth-quarter 2012 results.

Why Neutral?

On Feb 4, Edwards reported impressive fourth-quarter results after a setback in the third quarter. Its fourth-quarter adjusted earnings per share shot up 45.2% year over year to 90 cents, beating the Zacks Consensus Estimate as well as company expectations.

Revenues improved 18.7% to $510.5 million, surpassing the Zacks Consensus Estimate. For the year, adjusted earnings of $2.69 per share and revenues of $1,899.6 million also edged past the corresponding Zacks Consensus Estimate.

Like earlier quarters, margin expansion supported earnings upside for the company. Disciplined spending should support better margin, which in turn should leverage Edwards’ bottom line.

After a disappointing third quarter, the Transcatheter Heart Valves (THV) group regained its momentum on the back of the launch of Sapien in the U.S. for high-risk patients. With other clinical trials for Sapien progressing in a timely manner, we believe that the expansion of the target population should boost THV sales over the long haul.

We are also encouraged to note Edwards’ performance in Japan and emerging markets. Among the emerging markets, China is expected to surface as a major positive catalyst on the heels of anticipated product approvals in conjunction with favorable healthcare and economic trends. However, the Chinese market is also a happy hunting ground for Edwards’ competitors.

On the flip side, European macroeconomic woes dragged the performance of the company in the region. While Edwards is battling the contagion of economic problems in Southern Europe, Medtronic’s (MDT - Analyst Report) strides in its structural heart business in Europe is another cause of concern. Also, foreign exchange headwinds might hamper sales. We remain wary of an uncertain economy, currency headwinds and competitive tussle to stay on the sidelines for Edwards.

With a history of posting positive earnings beat and the agreement among analysts, the stock carries a Zacks Rank #2 (Buy). Other Zacks Rank #2 medical stocks are Myriad Genetics (MYGN - Analyst Report) and Conceptus (CPTS).