Guidance Will Be Key When Edwards Lifesciences Reports Q1 Earnings

Summary

• Edwards Lifesciences has shown consistent earnings and revenue growth in the last few years and it has strong profitability measurements.
• The company is scheduled to report first quarter earnings results on April 20 with earnings expected to decline slightly from Q1 2020.
• Sentiment toward the stock is mixed and expectations appear to be somewhat low at this point. From a contrarian perspective, these are good things.
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Medical device company Edwards Lifesciences (NYSE:EW) is scheduled to report first quarter earnings results in two weeks and the current estimates show a slight decline is expected. The current consensus estimate is for EPS of $0.48 and that's two cents below the $0.50 the company earned in the first quarter of 2020.

Edwards has seen earnings grow pretty consistently in recent years with an average growth rate of 14% per year over the last three years. Earnings growth did slow down in Q4 2020, but still managed to grow by 2% compared to the same period a year earlier. Second quarter results are expected to show growth of more than 50%, so the guidance that comes out with the first quarter report will be critical.

On the revenue side, the current consensus is $1.16 billion and that's 3.1% higher than last year’s $1.13 billion. Over the last three years revenue has grown by an average of 10% per year and it was up 1% in the fourth quarter. Analysts expect revenue to grow by 15.9% for 2021 and by 11.5% in 2022.

One area where Edwards does extremely well is in its profitability measurements. The return on equity is 26.9% and the profit margin is 30.6%.

Unfortunately the company doesn’t score as well when it comes to the valuation metrics. The trailing P/E is at 64.49 and the forward P/E is at 43.63. Even in an industry known for higher P/E ratios, those figures are higher than the industry average. They aren’t scary high, but they are a slight concern.

The overall fundamental picture for Edwards Lifesciences is pretty good. The profitability measurements are exceptional and the growth rates have been pretty good over the last few years. The outlook is strong and I don’t see the demand for heart-related devices dropping anytime soon. In fact, the long-term effects of COVID could mean that more people will require heart surgeries to repair or replace damaged valves.

Dual Layers of Support Should Help the Stock in the Near Term

Turning our attention to the technical analysis, Edwards Lifesciences has been trending steadily higher for the last three years. The trend was disrupted in the first quarter of last year, but a new upward trend has formed and it's defined by a trend channel. The lows from last June and October connect to form the lower rail and the highs from August and December connect the parallel upper rail.

The stock pulled back slightly in the first quarter and that brought it down to its 52-week moving average. The trend line appears to have acted as support as the stock has bounced over the last few weeks. With the 52-week just below $80 and the lower rail of the channel hovering around the $78.50 level, the stock has two layers of support.

The dip from January through mid March brought the weekly stochastic indicators down from overbought territory to oversold territory. The indicators made a bullish crossover in the last few weeks and similar instances in the past were good indications for the stock.

The Sentiment is Mixed with Analysts Showing the Most Pessimism

I was a little surprised when I started looking at the sentiment indicators for Edwards. The first indicator I looked at - the analyst ratings. There are 25 analysts covering the stock currently with 13 “buy” ratings. This gives us a buy percentage of 52% and that is below the average buy percentage. There are 11 “hold” ratings and one “sell” rating. For a company that has such strong fundamentals, it's surprising that the analysts are more bullish on the stock.

The latest short interest figures available are from the mid March report and it shows a short interest ratio of 2.1 currently. The ratio is below average and indicates slightly more bullish sentiment than the average stock. The number of shares sold short dropped from 6.74 million in mid February to 5.42 million in mid March.

Option traders are also displaying slightly more bullish sentiment toward Edwards than the average stock. There are 7,791 puts open and 12,249 calls open at this time. This gives us a put/call ratio of 0.636. The average put/call ratio falls in the vicinity of 1.0, so the ratio for Edwards indicates above average bullish sentiment. If we compare the ratio to where it’s been in recent months, the ratio is on the rise. When the company reported earnings in January, the ratio was only 0.33.

My Overall Take on Edwards Lifesciences

There's a lot to like about Edwards Lifesciences, more things to like than things to not like. The projected earnings and revenue growth are among the positive attributes and so are the ROE and the profit margin. Among the fundamental indicators, about the only things I didn’t like were the high P/E ratios, both the trailing and the forward are higher than the industry average.

On the chart, I like how the stock has used the 52-week moving average as support in the last few weeks and how it has a secondary layer of support with the lower rail of the trend channel. Seeing the weekly stochastic indicators make a bullish crossover and how the stock has performed under similar circumstances in the past makes me believe the timing is right for the stock to make another move higher.

The sentiment indicators are mixed and you should know that I use them in a contrarian manner. I like the fact that analysts are more pessimistic toward Edwards than they are the average stock. It leaves room for upgrades. The short interest ratio is a little lower than average and so is the put/call ratio. These low readings suggest that short sellers and option traders are more bullish toward the stock than they are the average stock. The put/call ratio has been rising and that suggest that option traders are becoming less bullish than in the past. The short interest dropped sharply in the last month and that suggest a drop in pessimism.

As for the upcoming earnings report, the expectations appear modest at this point in time. The consensus estimate for Q1 has been ratcheted down by two cents over the last 90 days and there have been 16 analysts that have lowered their earnings estimate for the year in the last 90 days.

Edwards has beaten estimates in six of the last eight quarters and the two times the company missed were in January of this year and January of last year—both misses being on Q4 earnings. The stock hasn’t really gapped very often after earnings reports, so unless there's a major surprise I wouldn’t expect a big gap higher or lower this time.

Overall I'm bullish on Edwards Lifesciences and can see the stock moving back up above the high from December. The upper rail of the channel would make a nice target and it is currently in the $97 range and should move up to the $100 level within the next few weeks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.