At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.
Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
Canaccord throws Edwards a lifeline
Yesterday was a big day for Edwards Lifesciences (NYSE: EW ) investors. As most of the world's markets were bathed in "red," EL shareholders were enjoying a big green day, with shares ending up 5% -- and for that, they can thank the friendly analysts at Canaccord Genuity.
Citing a robust TAVI (transcatheter aortic valve implantation) pipeline update and "more achievable" revenue targets among its brother analysts, Canaccord argued yesterday that Edwards deserves a "buy" rating. The analyst likes the company's new 2012 guidance numbers -- roughly $2 billion in revenues and $2.75 per share in pro forma earnings. It's particularly pleased with the TAVI numbers -- which show Edwards to be moving ahead even faster than the analyst had previously hoped to see -- and introducing multiple new products in support of the procedure.
Citing "near and long-term growth trajectory, margin profile and earnings potential" Canaccord now argues that this $67 stock could hit $75 within a year. Is it right?
Let's go to the tape
Sad to say, judging from Canaccord's record in the health-care equipment and supplies industry, the analyst is actually probably not right about Edwards. In fact, over the four years we've been tracking its performance in this industry, Canaccord has gotten the majority of its bets on med-equip companies wrong.
But even so, I can't really fault Canaccord for wanting to give Edwards another go-round. In an industry where the analyst's success has been pretty hit or miss, Edwards is one stock that has rarely let Canaccord down -- and actually been one of the analyst's top performers:
|
Company
|
Canaccord Rating
|
CAPS Rating
(out of 5)
|
Canaccord's Picks Beating (Lagging) S&P by
|
| Edwards Lifesciences |
Outperform |
*** |
130 points |
| Stryker (NYSE: SYK ) |
Outperform |
***** |
(14 points) |
| Zimmer Holdings (NYSE: ZMH ) |
Outperform |
**** |
(28 points) |
Still, while I respect the analyst's commitment to "dance with the stock that brung it," I'm afraid I have to disagree with Canaccord's contention that Edwards Lifesciences is a stock worth buying at today's prices. It's not. And in fact, I suspect investors who follow Canaccord's advice to buy Edwards today are more likely to lose money on the bet than profit from it.
Valuation matters
Consider: At 34 times earnings, Edwards' stock costs much more than its peers in the medical devices industry. Hospira (NYSE: HSP ) , Medtronic (NYSE: MDT), St. Jude (NYSE: STJ ) , and Boston Scientific (NYSE: BSX ) all trade in the mid-teens multiples. (As do Zimmer and Stryker, for that matter.) And while it's true that Edwards is growing faster than any of its rivals, I don't think it's growing quite fast enough to justify a valuation that in some cases is more than twice as pricey as its rivals.
Simply put, "28% growth" isn't fast enough to justify the 34 P/E price tag that investors are currently hanging on Edwards' stock. (Add in the fact that Edwards' free cash flow lags the company's reported net income, and I'd argue the stock is actually even more expensive than that.)
Yet, even as it advises investors to pay much more than a market multiple for Edwards, all Canaccord offers in exchange is slightly above market-average returns. Even if the stock hits its $75 price target next year, all this would translate into is about 12% profit from where the shares sit today.
Foolish takeaway
If you ask me, any investor satisfied with market average returns should do just that: Buy an index fund, and receive diversified risk for average returns. Using current prices, Canaccord's report suggests overpaying for a single stock with just so-so prospects. To me, this seems to me a sure-fire strategy for losing money.
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