Intuitive Surgical: Trade-in Sales Data Helps Confirm Bullish Case

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Intuitive Surgical (NASDAQ: ISRG) is a particularly unique medical equipment company that may offer massive long-term potential for investors.  For those of you unfamiliar with their product, the "da Vinci surgical system," it is a robotic device that operating surgeons control manually using a 3-D high-definition visual port.  If you have a moment, I would highly recommend web searching a video of their surgical system to see it in action.

Intuitive's business will go under the knife in this article, and we at Insider Monkey will point out some simple facts that might indicate this robotic equipment dominator is growing in the right direction.  At the end of our analysis, we’ll take a glance at some other medical equipment producers and healthcare stocks that might also be good for your portfolio.

Intuitive's robotic surgical system is designed for minimally invasive surgery and is claimed to be highly beneficial for patients undergoing certain procedures because smaller incisions are made.  This means less pain, shorter recovery time, and less time spent in the hospital.  Over time it's likely that the applications of robotic surgery will expand as improvements are made in this field to even more advanced surgeries.  Only time will tell if their stock will burst into quadruple digits, but some of their numbers hint that they're headed in the right direction (see why ISRG shares have surged higher lately).

Intuitive is now on their third generation of da Vinci surgical systems (1st. Standard da Vinci system, 2nd. da Vinci S system, 3rd. da Vinci Si system).  They generate revenue from the da Vinci system itself, along with peripherals and servicing contracts to maintain these systems.  As Intuitive upgrades their da Vinci systems, some customers exchange their old unit for a new one, and refurbished units can be re-sold at a lower price to other customers.  Trade-in sales can be an important metric for growing businesses and an excellent indicator of 1) existing customers who continue to use their product, 2) new customers, who may not want the newest model, and 3) existing customers who like the product and want to buy extra units second-hand at a discounted price.

Fortunately, we have some numbers that tell us what customers might be up to.  Looking at Intuitive's unit sales from 2009-2011, 16% involved trade-ins in 2009, 19% in 2010, and over 28.5% in 2011. For 1Q-3Q 2012, Intuitive has reported roughly 26% of unit sales from trade-in systems.

This is good news for Intuitive.

Increasing trade-ins sometimes hint that late adopters and laggards are purchasing Intuitive's product at an increasing rate. We naturally expect this to happen with new products over time, so more than anything it's a confirmation that their product is being accepted by the medical industry.  Looking at other recent performance, Intuitive has beaten earnings estimates for 14 consecutive quarters.  From 2008-2012, they reported exponential annual revenue growth of over 29%, and their SG&A expense is growing at a slightly lower rate of 27.3%.  Their unique product, stellar operational performance, and more than 425% return from a 2008 investment—based near their annual lows—have investors’ full attention (Check out recent hedge fund and insider trading data for ISRG).

So, is Intuitive Surgical a buy over $550 after falling below $100 in 2008?  Trading at over 32x earnings, it could be fairly valued given known uncertainties in their niche. With healthcare reform and economic headwinds still looming, it might be safer to start a small position and build it over time.  Intuitive reported quarterly earnings on January 22nd and beat by almost 5.5%.  Do not be surprised if their stock is trading over $650 this summer. 

In case you're wondering what other stocks would help expose your portfolio to the medical equipment sector, here are a few to consider:

1) Medtronic (NYSE: MDT), a well-known producer of medical equipment designed to diagnose, manage, and treat heart rhythm disorders. Pacemakers are one of their most popular products. Shares of MDT are down about 7.5% since the start of 2008, though the stock is up over 50% since hitting lows in 2011.

2) MAKO Surgical Corp. (NASDAQ: MAKO), producer of robotic surgical equipment designed to treat osteoarthritic disease, is up 14% since its 2008 IPO. The stock is down almost 75% from its 2012 highs and could present an excellent buying opportunity for investors.  MAKO is one of the most similar medical equipment makers to Intuitive Surgical, due to the fact that they manufacture robotic equipment in the same industry. With 2011 revenue growth of over 57%, and 2012 1Q-3Q quarterly growth of 97%, this smaller stock will be in our sights.

3) Johnson & Johnson (NYSE: JNJ): Of course Johnson & Johnson is on this list.  Sure, they're no surgical robotics manufacturer, but they offer products designed to treat some of the same diseases that Intuitive Surgical treats. In addition to offering an arsenal of over-the-counter pharmaceutical products, this company creates many devices used to diagnose and treat a wide variety of diseases.  You will find several handfuls of Johnson & Johnson products in most surgery rooms and doctor's offices across the world. Shares of the company are up over 50% from their 2008 lows, and currently offer a 3.4% dividend. Investors and analysts have been pleased with their current 5-quarter streak of earnings beats as this healthcare behemoth leads the sector. 

4) Baxter International (NYSE: BAX): Up over 28% since 2008, this medical instrument stock offers a 2.7% dividend.  The company creates solutions to treat hemophilia and other bleeding disorders, in addition to providing products and services related to pharmacy compounding, drug formulation, and packing. With a P/E ratio of 16.20 and an EBITD margin of around 25%, Wall Street loves this stock. Analysts’ average price target on Baxter represents a 4-5% upside from current levels, and hedge fund billionaire Ken Griffin upped his stake by over 160% in his last 13F filing with the SEC (see all of Ken Griffin’s favorite stock picks).


This article is written by Mark Jones and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.  The Motley Fool recommends Intuitive Surgical, Johnson & Johnson, and MAKO Surgical . The Motley Fool owns shares of Intuitive Surgical, Johnson & Johnson, and Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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