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Edwards Lifesciences (EW) produces medical devices. It has fabulous growth prospects. However, their current price levels are so high that buying EW shares cannot be justified by growth projections. Lofty valuations should dissuade investors until their high valuations descend closer to those of its peers.

Math > Glamour

Investors should not buy a stock because the company is disruptive or a game-changer. Investors should be focused on growing the value of their assets, AKA making money. Conceptually, I love compelling growth stories, but popularity, drama, the next big thing, and other distractors cannot justify paying one dollar for fifty cents.

Instead, investors should buy stocks trading at prices which make them good deals. A poor company trading at a dismal price may be an excellent trade. EW represents the other extreme: it is a great company trading at overly enthusiastic valuations which should be avoided. Valuation and growth metrics follow:

Ticker

Company

P/E

Earnings Growth Est.

P/S

Sales Growth Est.

Edwards Lifesciences

50.3

26.5%

6.8

10.1%

STJ

St. Jude Medical

14.9

10.1%

2.1

11.2%

SYK

Stryker

14.4

11.2%

2.3

10.1%

ZMH

Zimmer Holdings

14.3

10.2%

2.3

5.0%

MDT

Medtronic

12.1

6.6%

2.5

5.6%

There is clearly a disconnect in the static valuations of Edwards Lifesciences and when compared to industry firms which trade at half these multiples or less!

What about growth? The valuation multiples of a company can be modeled over time by utilizing expected growth and trailing valuation multiples for EW and peer stocks. Graphs of future price-to-earnings and price-to-sales ratios based on analyst growth estimates follow:

PE Ratio Analysis
(Click to enlarge)

EW PS Ratio Analysis
(Click to enlarge)

These projections illustrate the absurdity of current valuations for EW. Its shares do not reach comparable P/E ratios with other firms until 7 years in the future! On a P/S basis, Edwards Lifesciences shares only converge with Medtronic and Zimmer Holdings beyond 2030!

Estimated years of convergence were listed below for this stock:

EW Company

P/E Equivalence

P/S Equivalence

St. Jude Medical

2019

N/A

Stryker

2020

N/A

Zimmer Holdings

2020

2033

Medtronic

2019

2035

The dates of price-to-earnings equivalence span well into the future, demonstrating how EW shares are overpriced. Even assuming that long term analyst growth rates will continue indefinitely (which is itself ridiculous) it would take as much as a decade of this phenomenal, uninterrupted earnings growth for its valuation to be equivalent to that of Stryker. Company growth projections are not reliable more than a few (like two or three) years out. More distant time-frames are the basis of science fiction, not investing.

Investors should avoid EW at current prices. Instead, they should consider other companies on this list as more reasonable alternatives which can be justified without the absurdity of multiple decades of sustained, phenomenal growth. Stryker, in particular, appears attractive based on valuation and growth projections. It has a lower and declining price-to-sales and price-to-earnings valuations in the near future where projections are actually meaningful.

Please read the article disclaimer.

Source: Obese Valuations For Edwards Lifesciences