Edwards Lifesciences Corp (EW): A Strong Buy on Recent Dip – Medtronic, Inc. (MDT), St. Jude Medical (STJ)

Back in October, when Edwards Lifesciences Corp (NYSE:EW) missed earnings forecasts and the stock plummeted to its lowest in 10 years, I rated it a buy. If you had listened, you would have profited from the rally that followed. Now, after three months, history is repeating itself.

Edwards Lifesciences is a medical device manufacturer and holds a monopoly-like position in the U.S. for its Transcatheter Heart Valve (THV) called SAPIEN. It is the only device that the FDA has approved for Transcatheter Aortic Valves Implantation (TAVI) procedure that has replaced open heart surgery for diseased aortic valves.

Q4 recap

In the latest quarter, Edwards beat both earnings and revenue forecasts. Revenue jumped 18% year-over-year, while earnings soared 44%. FDA’s approval to the use of its SAPIEN device, that came back in October, has been the major cause behind its massive growth following the Q3 forecast miss.

The good news

Despite a string of good news — earnings beat, FDA approval of SAPIEN, launch of a new SAPIEN XT, and the U.S. court’s decision in Edwards Lifesciences Corp (NYSE:EW)’s avor to block competitor Medtronic, Inc. (NYSE:MDT) in the U.S., and no considerable bad news, the recent dip seems unwarranted. Here are a few reasons why I believe Edwards is still a strong pick for the long haul.

The core competency: Improved SAPIEN

Firstly, management had significantly stepped up R&D in FY2012, thus gaining speedy progress in the transcatheter valve technology. R&D investments in the latest quarter alone grew 23% to $75 million, accounting for 15% of sales. For the new year 2013, management guides R&D expenses to be between 14% and 16% as a percentage of sales.

The company has just introduced an improved version of SAPIEN called SAPIEN XT, and is presently seeking FDA approval post successful clinical trials in the U.S. The device has already been approved in Europe and other markets, but awaits clearance in the U.S. Once it does, this will prove to be yet another breakthrough for the company and further deepen its foothold in the U.S.

Overcoming the weaknesses

Secondly, if you recall, Europe was the only region that showed negative growth in the third quarter. CEO Mike Mussallem reassured us of a future comeback and he lived up to his words. In the latest quarter, Europe saw an approximate 10% sales growth. The biggest threat to the Edwards’ SAPIEN in this region is posed by MMedtronic, Inc. (NYSE:MDT)’s CoreValve–a close substitute.