What happened
Shares of medical device maker Edwards Lifesciences (EW -0.59%) fell 16.6% through 11:45 a.m. ET on Friday even though the company missed analyst targets for third-quarter earnings last night by only the slimmest of margins.
Analysts had forecast that Edwards would show earnings per share (EPS) of $0.62 on sales of $1.33 billion in last night's report. Its actual results: $0.61 in EPS and $1.32 billion in sales.
So what
Is that tiny $0.01 miss really worth a 16.6% sell-off? For the fiscal third quarter, sales grew only 1%, hurt primarily by unfavorable currency exchange rates. In constant dollars, Edwards says its sales would have grown 7%.
On the other hand, the $0.61 in EPS is only a pro forma figure. When calculated according to generally accepted accounting principles (GAAP), Edwards' earnings for the quarter were only $0.55 per share. But even so, that was up about 2% year over year, so it's arguably better than the sales number.
Now what
Edwards' numbers weren't great, but they weren't horrible, either. So perhaps what investors are really upset about today isn't the third-quarter results, but the fourth-quarter guidance.
Management says full-year (pro forma) profits this year will probably range from $2.40 to $2.50 per share. Even at the top end, that's a penny short of Wall Street's consensus projection for $2.51. The new guidance is also below the $2.50 to $2.65 range Edwards had promised earlier this year. And since all these are pro forma numbers, you can probably expect that GAAP results will be weaker than these projections. (Oh, and revenue growth should be no more than 6% for the year.)
On top of all this, Edwards stock is trading at a lofty 30.6 price-to-earnings ratio (based on GAAP profits). That's about 50% more expensive than the average S&P 500 stock -- and looks really expensive for a stock that's only growing sales and earnings in the low single digits. So I'm afraid that the investors selling off Edwards Lifesciences stock today are right to do so.
