1 Heart-Pounding Growth Stock

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Where is the greatest amount of health care dollars spent? According to the federal government, the answer is in treating heart disease. Despite decreasing mortality rates, heart disease still ranks as the No. 1 killer in the U.S., with over 27 million Americans diagnosed with the condition.

One company at the forefront of treatment for heart disease is Edwards Lifesciences (NYSE: EW  ) . Edwards is a leading medical device manufacturer. Should investors follow the health care money trail and buy shares in Edwards? Let's take a look.

Money pulse
Financially, Edwards appears to be in decent shape. The company's 2011 sales were up 16% compared to the prior year. Net income was only up 8.5%, though. Special charges associated with European receivables risks, along with one-time charges for employee severance packages and a litigation settlement, kept net income gains from being solidly in the double digits.

Edwards has consistently generated solid free cash flow over the past few years. However, first-quarter results for 2012 reflected negative operating cash flow and free cash flow. The company attributed the cash flow decline to the impact of excess tax benefits from stock plans and the timing of supplier payments. While these don't appear to be causes for worry now, investors should watch for any signs of future issues with cash flow.

The stock hasn't skipped a beat. Shares are up over 40% so far this year. Edwards looks even better over the past five years, with the stock skyrocketing more than 300%.

Not for the faint of heart
The medical device business isn't for the faint of heart, though. Competition is fierce.

Medtronic (NYSE: MDT  ) perhaps presents the most formidable challenge to Edwards. The company's cardiovascular sales totaled nearly $3.5 billion in fiscal year 2012. Edwards and Medtronic battle in the marketplace -- and the courtroom. The two companies have engaged in at least four patent-related lawsuits over the past three years.

Another rival is St. Jude Medical (NYSE: STJ  ) . St. Jude's 2011 cardiovascular sales were over $1.3 billion. The company states that over two million of its mechanical heart valves have been implanted in the last 30 years. However, St. Jude competes against Edwards in the tissue heart valve market. Tissue valves have gained traction versus mechanical heart valves in part because of the reduced risk of blood clots.

Edwards does battle with several smaller competitors for market share in the critical care monitoring market, including ICU Medical (Nasdaq: ICUI  ) . The company makes hemodynamic monitoring systems that compete against Edwards' products. ICU's 2011 critical care sales were $61.4 million, compared with $508.3 million for Edwards.

Potential palpitations
Several potential catalysts exist that can either continue the stock's upward trajectory or cause shares to fall.

One positive possible spark involves Edwards' Sapien transcatheter heart valve. This valve enables doctors to replace defective aortic valves without open heart surgery. The Centers for Medicare and Medicaid Services approved reimbursement for Sapien procedures in May. Increased adoption of the Sapien valve in the U.S. could drive Edwards' shares higher.

Another relates to the U.S. Food and Drug Administration's recent approval of trial for the Edwards INTUITY valve system. The goal of this new valve is to reduce procedure times through smaller incisions and rapid valve deployments. INTUITY already received the CE Mark, the European Union consumer safety stamp of approval, in February. This new valve is another potential winner for Edwards.

A big concern, though, is the impact of Obamacare's medical device excise tax that will take effect in 2013. Edwards states that this tax will increase the company's operating expenses. Several studies predict that this tax will seriously harm the medical device industry. Other studies, however, claim that the industry will not be significantly affected.

To buy or not to buy
Should investors buy Edwards Lifesciences?

Value investors should probably look elsewhere. The stock is trading around 30 times forward earnings and more than six times trailing-12-month sales. Income investors should also take a pass. The company doesn't currently pay a dividend and has no plans to do so.

If you're a growth investor willing to roll the dice a little, Edwards might be a stock for you to consider. There are risks, but the company has the wind at its back in several areas. Good news on the regulatory front could mean solid returns over the next few years.

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Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of Medtronic and St. Jude Medical. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 26, 2012, at 3:56 AM, schmidty412 wrote:

    Good article on a great company. I've owned EW for 5 years now. B/c it is an organic growth company, instead of m&a, I will stay in. 2yrs ago there was a stock split at ~$110. If the stock sticks close to this price any thoughts on another split?


  • Report this Comment On July 26, 2012, at 11:28 AM, TMFFishBiz wrote:

    Thanks, schmidty412! It certainly wouldn't surprise me to see EW split at some point in the not-too-distant future - maybe sometime in 2013.

  • Report this Comment On July 28, 2012, at 5:51 AM, schmidty412 wrote:

    On that note, what are the typical factors that need to happen for a typical split? I doubt I'd stay in just for that but would still like to know. Keep up the good work.

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EW $117.03 Down -0.65 -0.55%
Edwards Lifescienc… CAPS Rating: ****
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STJ $79.42 Up +0.06 +0.08%
St. Jude Medical CAPS Rating: **