The announcement of Edwards Lifesciences’ (EW) first quarter fiscal 2011 results as on April 20, 2011, has led analysts to revise  their estimates upwards.

Previous quarter highlights

Edwards reported an adjusted EPS of 51 cents (excluding 2 cents per share of transaction gains) in the first quarter of fiscal 2011, way above the Zacks Consensus Estimate of 42 cents and the year-ago quarter’s EPS of 40 cents. The company reported revenues of $404.5 million, up 18.8% from the year-ago period and exceeded the Zacks Consensus Estimate of $385 million.

Edwards generated 37% of its revenues during the quarter from the domestic market, which recorded a growth of 7.8% to $149.1 million. In the international market, the highest growth was recorded by Europe (up 29.5% to $139.5 million), followed by Japan (up 23.7% to $69.3 million) and Rest of World (up 21.2% to $46.6 million).

Heart Valve Therapy remained the strongest segment at Edwards with an annualized growth of 24.5% to $244.9 million. Sales of surgical heart valves grew 9.2% to $172.2 million and transcatheter heart valves (THV) recorded an 85.7% growth to reach $72.7 million. Other segments of the company, Critical Care, Cardiac Surgery Systems and Vascular recorded sales of $120.6 million (annualized growth of 14.8%), $26.1 million (up 5.5%) and $12.9 million (down 7.5%), respectively.

Following strong first quarter results, Edwards raised its outlook for fiscal 2011. The company expects to generate revenue of $1.66−$1.74 billion (previous guidance of $1.59−$1.67 billion) with a gross margin on the lower end of the 71%-73% range. It also raised its adjusted EPS guidance by 10 cents to $2.01−$2.07.

For a full coverage on the earnings, read: Edwards Beats, Raises Estimates

Agreement of Analysts

With strong first quarter results and in line with the company’s raised guidance, the majority of analysts have revised their estimates upwards. Over the last 30 days, 20 of the 23 analysts covering the stock have increased their estimates for the second quarter of fiscal 2011, with no revision in the opposite direction. Maintaining the same trend, 22 analysts raised their estimates with no downward revisions for fiscal year 2011, over the past one month.

Robust growth of the company’s Heart Valve Therapy segment including greater acceptance of the Sapien portfolio in Europe led the analysts to raise their estimates for the forthcoming period. Although Edwards has witnessed strong growth in THV banking upon the successful launch of  its Sapien products in Europe, the product is yet to receive approval in the US.

The company nevertheless expects to launch Sapien THV in the US during the fourth quarter of 2011 and expects sales of approximately $20–$25 million. Following its potential approval in the US, Edwards will try to receive reimbursement for the product. Approval of the device in the US or Japan should boost revenues of the company in the long term.

Edwards also recorded robust growth in its Critical Care segment based on strong sales of advanced monitoring products led by Flotrac systems and pressure monitoring products. Moreover, the recent launches of VolumeView and EV1000 outside the US have been progressing well, though the contribution to sales was modest during the quarter.

With these products fetching positive clinician feedback, they could drive market share going ahead. The company expects to receive US approval for these products in the third quarter. Edwards is also gaining traction with the second generation product of its glucose monitoring program and expects to receive CE Mark approval by the end of 2011. Successful commercialization of these products should further contribute to growth.

Magnitude of Estimate Revisions

Despite the overwhelming response to first quarter results from the broking community, the magnitude of revisions has been modest for the next two quarters. Overall, estimates for the second quarter have gone up by 2 cents to 50 cents while third-quarter estimate remained unchanged at 43 cents. Estimates for fiscal 2011 witnessed an increase of 11 cents to $2.06 over the last 30 days.

Our Recommendation

Edwards recorded strong revenue growth during the first quarter banking on robust performance of its Heart Valve Therapy products. Apart from Heart Valve Therapy, the strong growth recorded by Critical Care is also encouraging. Moreover, the company’s strong balance sheet enables it to target suitable acquisitions.

However, the company operates in a highly competitive environment with many big players such as Medtronic (MDT) and Boston Scientific (BSX) targeting the THV business.  Moreover, Edwards is trading at a premium compared to its peers. Since investors are watching the development of the Sapien portfolio in the US keenly, which is expected to be approved in 2011, any hiccup in the process will be a major dampener for the stock.

We have a ‘Neutral’ recommendation on the stock which corresponds to the Zacks # 3 Rank (Hold).

About Earnings Estimate Scorecard

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