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Better Buy: Medtronic, Inc. vs. Edwards Lifesciences Corp.

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The American College of Cardiology meeting is always good for market-moving news, and this year was no different. A range of companies trotted out their latest innovations and put their best spins on their latest trial data at the event last weekend. 

However, it was Medtronic (NYSE: MDT  ) , the industry medical device giant, that put up the most noteworthy news this year when it unleashed data showing that patients receiving its CoreValve transcatheter through a minimally invasive procedure did better than patients who had open heart surgery. That marked the first time that the procedure outpaced surgery, and clears the way for Medtronic to challenge rival Edwards Lifesciences  (NYSE: EW  ) , the only company that's currently offering a competing valve in high risk patients.

MDT Chart

MDT data by YCharts

Is one a better buy?
The battle for market share won't begin quite yet. Medtronic's CoreValve is only approved for use in the highest risk patients -- it got that approval in January -- and not high risk patients. That said, Medtronic's data suggests that CoreValve may also get an FDA nod for use in the healthier patient group. Medtronic currently expects that decision to come in the middle of fiscal 2015, which means sometime this fall.

Medtronics transcatheter sales (CoreValve is approved for use in Europe) have grown a compounded 60% in each of the past two years. However, that growth has had a muted impact on Medtronic given Medtronic's nearly $17 billion in global sales.

Edwards' competing Sapien transcatheter heart valve has also been a strong performer, and has had a bigger impact on its top line given Edwards' smaller size. Sapien sales underpinned 22% growth in transcatheter heart valve sales at Edwards last quarter, and helped lift Edward's overall sales by 11% last year. 

Since Edwards sales have been growing more quickly than Medtronic's, investors have been more willing to pay a premium for its sales relative to Medtronic's. 

Dividing the current price by each company's trailing 12 month sales shows that Medtronic is a bit less expensive at 3.7 times revenue. However, that ratio is the highest in five years, suggesting investors are increasingly warming up to Medtronic's potential. Meanwhile, Edwards' 4.15 times sales ratio is not only higher than Medtronic's, but is also well off its 2011 and 2012 peak, suggesting investors are less inclined to pay up for shares in the company.

MDT PS Ratio (TTM) Chart

MDT PS Ratio (TTM) data by YCharts

Debating earnings
Another way to compare the two is to consider how pricey each is compared to its earnings. First, let's see which of the two does a better job converting sales into profit. Medtronic's operating margin is 28.6%, while Edwards' is 22.2%.

Medtronic's friendlier margin suggests that an increase in transcatheter procedures could have a bigger impact on it than on Edwards. You might think that Medtronic's operating margin advantage would translate into investors being more willing to pay up for Medtronic's earnings than Edwards' earnings, but thus far you'd be wrong.

When considering their future price to earnings ratios, Medtronic's shares are trading at 15 times earnings, while Edwards' shares are trading at more than 21 times earnings. That already suggests Medtronic is cheaper than Edwards, but given that Medtronic's earnings estimates have remained stable for next year over the past three months, while Edwards' estimates have sank, suggests there may be a disconnect between the two that investors can use to their advantage.

Fool-worthy final thoughts
The real winner in this battle is patients. 83% of those treated with the self-expanding CoreValve were stroke free after four years. However, investors interested in picking up shares to capitalize on the likely increase in transcatheter procedures should probably lean toward Medtronic.

After all, Medtronic is less expensive to sales, less expensive to earnings, and appears to have an edge in outcomes based on the recently reported data. In case those reasons aren't compelling enough, investors shouldn't forget that while Edwards doesn't pay a dividend, Medtronic does.

Medtronic's 1.8% yield may not be a barn burner, but its 25% cash dividend payout ratio, which reflects operating cash minus capital expenditures and preferred dividend payments, suggests there's plenty of room for Medtronic to grow it. 

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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Related Tickers

9/1/2015 2:13 PM
EW $135.84 Down -5.04 -3.58%
Edwards Lifescienc… CAPS Rating: ****
MDT $69.57 Down -2.72 -3.76%
Medtronic CAPS Rating: ****