Summary

• This is an excellent company that has delivered 20% annual returns since 2000.
• The core earnings per share ought to grow by 15%-20% annually in the coming years.
• The most significant concern about Edwards Lifesciences is the current valuation, which is a bit high.

There are certain excellent companies that, for whatever reason, do not get much attention from the financial press even though they quietly go about their business of making shareholders richer year after year. One such company that belongs on that list is Edwards Lifesciences (NYSE:EW ), an excellent company that doesn’t get much attention because it doesn’t pay a dividend, is only a $13 billion company, and operates in the medical machinery field so it is not the kind of company that a lay investor would regularly encounter in passing.

For those of you that are new to studying Edwards Lifesciences, here’s the intro primer: It is a company that builds out the technologies used to treat critically ill patients with varying problems stemming from heart disease. It has three different business segments: it operators in the field of Surgical Heart Valve Therapy, and that segment represents 40% of the company’s revenues. It operates in the field of Transcatheter Heart Valves, and that accounts for 35% of revenues. And lastly, its smallest business segment is Critical Care, which makes up the remaining 25% of revenues.

What I like about this company is that it seems to have a very strong internal rate of compounding that has proven to be sustainable over long periods of time. It earns a 15.0% return on total capital, and company’s lowest returns in the past twenty years came in 2004 when the return on capital was 12.4% (and the highest year was 2012 when the company achieved returns of 19.2% on total capital). With consistently high returns on capital like this, you would expect robust revenue and earnings growth (and in this case, you would be right).

Over the past ten years, Edwards Lifesciences has grown revenues by 10% annually and increased earnings per share by 15% each year. The total returns over this time frame have been quite nice, as investors have compounded their money at a rate of 20% annually from 2004 through 2014.

Because of the company’s recent settlement with Medtronic (NYSE:MDT ), it has a little under $1 billion remaining to repurchase shares of the stock. The company has retired a little over 5 million shares so far this year, and the remaining allowance under the current buyback program should retire an additional 7.3% of the stock as well.

My principal concern with the stock has to do with valuation. Even though some stock screeners indicate that Edwards Lifesciences has earned $7.20 in the previous twelve months, the figure is illusory because about half of that is the result of the Medtronic settlement that is not indicative of the company’s profits going forward. Earnings per share is more like $3.30 per share once you exclude one-time items. So really the $127 per share price is more like a P/E ratio of 38.

Even though that valuation is on the high side, it can still make a good investment from this point because the revenue growth and earnings per share growth is so robust. The Sapien XT launch is expected to propel 15%-20% annual earnings per share over the medium-term, such that you could still earning positive future returns from this point (if the company earnings $6.60 per share in four years, even some P/E compression could still lead to a successful investment-if the P/E ratio comes down to 27, you’d be looking at a valuation of $178 per share).

That said, there does exist a significant discrepancy between the current price of the stock and my limit buy order. Even acknowledging its excellent growth prospects, I am not comfortable with the risk/reward probabilities once the price of the stock trades in excess of 25x profits (that’s why my current buy order is at $82.50, significantly below the current price of the stock).

I do think Edwards Lifesciences is an excellent company, with great future growth prospects, and a great track record. I mean, since 2001, profits have sextupled from $0.52 per share to $3.30 per share now. The Critical Care segment, which had been the lagging part of the company’s business, has grown revenues at 8% in the past year. When you combine this with the Transcather Heart Valve division that is growing at 21% annually, you are in position to do very well over the coming years. In other words, even if you’re not as conservative as me when it comes to calculating an acceptable price to pay, I think there is a good chance that you will do quite well over the long term because the earnings per share of the company are growing so fast.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.