Has Edwards Lifesciences Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Edwards Lifesciences (NYSE: EW  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Edwards Lifesciences.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 10.7% Fail
  1-Year Revenue Growth > 12% 14.7% Pass
Margins Gross Margin > 35% 71.1% Pass
  Net Margin > 15% 13.7% Fail
Balance Sheet Debt to Equity < 50% 12.9% Pass
  Current Ratio > 1.3 4.48 Pass
Opportunities Return on Equity > 15% 17.3% Pass
Valuation Normalized P/E < 20 52.94 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Edwards Lifesciences last year, the company has lost a point. A drop in net margins is responsible for the score decrease, but the stock has managed to more or less break even over the past year.

Edwards has been known for its cardiovascular products ever since Baxter International spun the company off more than a decade ago. With a wide range of heart valves, blood-vessel catheters, and heart-monitoring systems, Edwards has built up a strong business poised to take advantage of prevailing demographic trends toward increased demand for health care from an aging population.

But for a long time, Edwards' Sapien Transcatheter Heart Valve has been a major driver of the company's future potential, in part justifying the stock's rich valuation. The company earned FDA approval for a limited selection of inoperable patients last November, but it's looking to serve a much broader set of patients. With an FDA advisory committee meeting expected later this month, a recommendation for approval could be a big step forward for the company; it could join giants Medtronic (NYSE: MDT  ) and St. Jude Medical (NYSE: STJ  ) as a key player in the cardiovascular industry.

But even as Edwards may see further revenue growth, it could also get hit by a new tax. Health care reform includes a 2.3% excise tax on medical-device makers. Already, Boston Scientific (NYSE: BSX  ) and Stryker (NYSE: SYK  ) have taken some steps to cut back production or move it beyond the reach of the tax, and the impact on Edwards and its already fragile margins could be devastating.

For Edwards to push its score higher, it needs to have Sapien approved and its high reimbursement rate sustained. The stock is already priced for success, so anything less could be a huge blow for shareholders.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Edwards Lifesciences isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Edwards Lifesciences to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of St. Jude Medical. Motley Fool newsletter services have recommended buying shares of Stryker. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On June 04, 2012, at 2:05 PM, MrSinnister wrote:

    Why not do an in-depth research report on both why Discovery Labs isn't moving and why now is the perfect time to both invest in Biotechs and DSCO? They have been major M&A targets the past Spring, and I don't see that stopping in the near future.

    Received FDA approval for 1 of its drugs, SURFAXIN, and its nebulizer Affectair on March 5th of this year. PPS Spiked at 5.39 until a week later, a secondary offering of 16 million shares @2.80 was submitted, killing the momentum from the FDA approval and leaving it in the doldrums where it sits today, lagging behind companies with only ONE drug and deeply in the red like Seattle Genetics SGEN, currently trading at over 19. DSCO is slated to have it's distribution pipeline for its infant RDS (Respiratory Distress Syndrome) drug out by the end of the year, with EU approval next year. Trading at currently 2.52, this stock could be the steal of the year, and can actually beat Bank of America (before the crises) as comeback stock or Stock of the Year. The volume is currently dismal as longs have rooted into their positions and currently not selling. Check it out and do your own due diligence.

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