A Form 4 filed with the SEC has disclosed that Wesley von Schack, a member of the Board of Directors at Edwards Lifesciences Corp (NYSE:EW), directly acquired 2,000 shares on April 26th at an average price of $64.95 per share. Edwards Lifesciences is a $7.3 billion market cap medical device company with a focus on cardiovascular therapy products such as heart valves. We track insider purchases because studies show that stocks bought by insiders exhibit a small outperformance effect (read our analysis of studies on insider trading); we think that this is because it is generally rational for insiders to sell shares in order to increase diversification, and so buying should signal some level of confidence in the stock.
In the first quarter of 2013, Edwards Lifesciences Corp (NYSE:EW) increased its revenue by 8% versus a year earlier. With cost of goods sold actually decreasing, the company experienced a 27% increase in pretax income if we ignore a large special gain during the quarter. Adjusted earnings per share slightly missed analyst expectations, but overall we’d still consider these to be good results.
At current prices Edwards Lifesciences Corp (NYSE:EW) trades at 20 times trailing earnings, so the market is already pricing in high growth for at least a short period. Wall Street analysts are not particularly optimistic; they do expect earnings per share to increase by a bit over the next couple years but consensus forecasts for 2014 give a forward P/E of 18- which we would still consider a valuation dependent on considerable improvements on the bottom line. The stock price has fallen 23% in the last year against a rising market as investors have become less confident in the company, potentially instigating von Schack into buying these shares.
We track quarterly 13F filings from hedge funds and other notable investors to help us with our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and can use our database to see which filers owned Edwards at the beginning of this year. We can see that Sectoral Asset Management was the only filer we track which owned over $20 million of the stock at the end of December; Sectoral’s 13F shows it owning 1.4 million shares (find Sectoral’s favorite stocks). Billionaire Steve Cohen’s SAC Capital Advisors initiated a position of about 170,000 shares during Q4 (see Cohen’s stock picks).
Peers for Edwards Lifesciences Corp (NYSE:EW) include Medtronic, Inc. (NYSE:MDT), St. Jude Medical, Inc. (NYSE:STJ), Baxter International Inc. (NYSE:BAX), and Becton, Dickinson and Co. (NYSE:BDX). All four of these peers trade within a range of 13 to 17 times their trailing earnings, meaning that Edwards is valued at a premium relative to similar companies. Generally low growth is expected at these peers as well, and so all four are cheaper than Edwards on a forward earnings basis as well. However, recent financial performance has been lackluster: St. Jude actually reported a decline in revenue in its most recent quarter compared to the same period in the previous year, with the other three businesses seeing no more than a 4% increase on the top line.
We are skeptical that Edwards Lifesciences Corp (NYSE:EW) can continue to grow its pretax income at the high rates it did in Q1 without higher revenue growth as well, and so even with the insider purchase we are doubtful that the stock is a good value. The company actually does not look too expensive compared to its peers, demonstrating at least moderate increases in sales while the other four businesses we looked at struggled to some degree. However, we would conclude that the industry as a whole does not appear to be a good source of value rather than that there is some case for Edwards Lifesciences Corp (NYSE:EW) on that basis.
Disclosure: I own no shares of any stocks mentioned in this article.