Read This Before Buying Seagate Technology Stock

We think that Edwards Lifesciences currently is a better pick compared to Seagate Technology. Both companies have similar net income of around $1.5 billion, but Seagate’s current P/S multiple stands at 2x, while EW’s stands at almost 15x. Do these valuations make sense? We think so, and we believe this gap can only widen. While both companies have seen a strong rise in revenues since the lockdowns started being lifted, Edwards Lifesciences has seen much more steady and consistent sales growth over the past five fiscal years compared to Seagate. EW’s revenues have risen from $3 billion in FY ’16 to over $5 billion on an LTM basis. In comparison, Seagate’s sales have consistently hovered just below the $11 billion mark since FY ’17, and currently stand slightly higher at $11.5 billion on an LTM basis (Seagate’s fiscal year ends in June).

Having said that, we dive deeper into the comparison, which makes Edwards Lifesciences a better bet than Seagate, even at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating income and operating margin growth, along with the financial position. Our dashboard Seagate Technology vs Edwards Lifesciences: Similar Income, But Edwards Lifesciences Is A Better Bet has more details on this. Parts of the analysis are summarized below.

1. Edwards Lifesciences Ahead On Revenue Growth

Both companies managed to see strong sales growth post the pandemic, but Edwards Lifesciences has witnessed steadier and more consistent revenue growth over the years. EW’s sales have jumped from $3 billion in FY ’16 to just over $5 billion on an LTM basis, while Seagate’s revenues have only just crossed $11 billion on an LTM basis, after hovering just below $11 billion since FY ’17.

Additionally, EW’s pre-Covid annual sales growth stands at 13.7%, higher than Seagate’s -2.8%, and even growth during Covid stands at around 1%, at par with that of Seagate. However, for the most recent quarter, Seagate saw more than 30% sales growth YoY, more than EW’s 15%. But on an LTM basis, EW’s sales growth stands at 16.6%, more than Seagate’s 12.1%.

Additionally, EW’s sales growth over the years has been much more consistent compared to Seagate, and we believe this should be rewarded in the form of a higher valuation for EW.

2. Edwards Lifesciences Ahead On EBIT Margins, And In A Better Cash Position

EW’s P/EBIT ratio stands at almost 45x currently, much higher than Seagate’s 13x. This is fair since EW’s LTM EBIT margins stand at 32.7%, much higher than Seagate’s 16%. In terms of recent margin growth, too, EW stands ahead, with LTM vs last three FY margin change at 10.3%, more than Seagate’s 2.4%. Additionally, Edwards Lifesciences has seen more consistent EBIT margin growth than Seagate, and we believe it deserves the higher P/EBIT multiple.

Now, looking at both companies’ cash position, EW’s debt as a % of equity stands at around 1%, vs Seagate’s 21.7%. Additionally, EW’s cash as a % of assets stands much higher at 22%, compared to Seagate’s 11.5%.

3. Finally, Edwards Lifesciences Is Ahead In Terms Of Expected Returns

Using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Edwards Lifesciences is the better choice. EW’s LTM revenues of $5.1 billion are expected to rise at a CAGR of 10.1% as per our estimates, taking revenue numbers three years out to around $6.8 billion. Assuming EW’s P/S ratio to pull back to an average of about 13.2x, this means that the market cap would still rise by about 20% over three years to $90 billion.

In comparison, given historical trends, we expect Seagate’s sales to rise slower at a CAGR of just 1.6%, taking revenue in three years to around $12 billion. However, considering the P/S for Seagate to correct to historical averages of around 1.7x, we estimate a market cap of $20 billion for Seagate, much lower than the level it is at today.

The Net of It All

While Seagate’s revenues are more than 2x as large as that of Edwards Lifesciences, the latter has seen steadier and more consistent revenue growth over the years, combined with stronger EBIT margins and a better cash position. Our comparison of recent performance also favors Edwards Lifesciences, and we believe that EW deserves a higher P/S and P/EBIT multiple compared to Seagate, due to a stronger, more consistent performance, and we believe that the gap in the companies’ valuations should only widen. As such, we believe that Edward Lifesciences stock is currently a better bet compared to Seagate stock.

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