Intuitive Surgical Fairly Valued, But Well Worth Buying on Pullback

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

Intuitive Surgical's (NASDAQ: ISRG) da Vinci Surgical System offers surgeons superior 3D HD visualization, enhanced dexterity, greater precision and ergonomic comfort for the optimal performance of MIS. The da Vinci System enables surgeons to perform even complex procedures, such as heart valve and cancer surgery through 1 to 2 centimeter incisions. This breakthrough is allowing hospitals everywhere to extend the benefits of MIS to a broader base of patients. An investment in an MIS initiative built around the da Vinci Surgical System can provide hospitals with greater productivity and operational efficiencies. Improved operational efficiencies may result in reduced incidence of complications and post-operative infections; reduced need for blood transfusions and post-operative pain management, simplified post-operative nursing care and reduced length of stay.

Today, more than 2,462 da Vinci Systems are installed in over 1,936 hospitals worldwide. As of March 31, 2011, Intuitive Surgical held exclusive field-of-use license for more than 870 U.S. and foreign patents as well as more than 990 pending U.S. and foreign patent applications. Intuitive Surgical's patents and patent applications relate to a number of important aspects of its technology, including the surgeon console, electromechanical arms, vision system, endoscope positioning system and EndoWrist instruments. In addition to developing its own proprietary technologies, Intuitive Surgical has established relationships with several industry leaders, including IBM (IBM) Massachusetts Institute of Technology (MIT), Johns Hopkins University (JHU) and Johnson & Johnson (JNJ).

Financials

The company reported third quarter revenue of $538 million, up approximately 20% compared with $447 million for the third quarter of the previous year. Revenue growth was driven by continued adoption of da Vinci surgery procedures and higher da Vinci Surgical System sales of 155 da Vinci Surgical Systems, compared with 133 system sales during the same period of the previous year. Third quarter of 2012 instruments and accessories revenue increased 24% to $218 million from $176 million in the third quarter of 2011 as a result of growth in da Vinci surgical procedures and the introduction of new products. Quarterly operating income increased to $211 million from $179 million in the third quarter of the previous year. Third quarter net income was $183 million, or $4.46 per diluted share, compared with $122 million, or $3.05 per diluted share, for the third quarter of 2011. Intuitive ended the third quarter of 2012 with $2.7 billion in cash, cash equivalents and investments, management has already estimated revenue growth of 21%-23% for the remainder of 2012. Analysts expect Intuitive Surgical to earn just under $18 per diluted share in 2013.

Intuitive and the Robotic Surgery Market

Robotic surgery made its first appearance in the early 2000's and has grown to a $1 billion industry today. Titan Medical (TITXF) estimates that the market for robotic surgery equipment will grow to over $4 billion in five years. The industry is currently dominated by one major company, Intuitive Surgical's da Vinci System is making a major impact in the healthcare field. Conventional surgery requires the surgeon and his team of up to a dozen people to stand around the patient using hand held instruments that cannot be easily manipulated. The surgeon must look away from the patient to a 2D video monitor to see an image of the target anatomy. With the da Vinci System, the surgeon is stationed at an ergonomically designed console and uses patented EndoWrist instrumentation with a 3D monitor directly in front of the surgeon.As a result, his team can be reduced to just four people.

Future Prospects

Unfortunately, analysts have such high expectations for the company that even a solid performance for the third quarter did not satisfy many people. Any other company would have been happy with the revenue growth and net income figures that were posted. Europe continues to be a problem with slower procedure growth, as expected. The company had foreseen this and predicted in July that third-quarter revenue could come in near or below second quarter levels because of European problems. As it turned out, third quarter revenue increased only marginally from the second quarter. Some prospective investors could be concerned that the European woes and slowing U.S. prostatectomy procedures will slow the company's future growth more than anticipated. Others might also believe that the stock is too expensive with a forward P/E of 30 when other medical device makers trade at much lower multiples.

Competition

Medical-devices company Edwards Lifesciences (NYSE: EW) offered an early warning for investors when its earnings showed weakness in Europe. Sales of its heart valve in the third quarter fell on a weak surgical market in Europe. However, it should be noted that Intuitive performed better in Europe than many of its competitors, including Stryker (SYK) and Boston Scientific (NYSE: BSX). Both showed weakness in the third quarter in terms of poor international sales. Intuitive's recent performance has also been stronger than that of MAKO Surgical (MAKO), which many people regard as a clone of Intuitive. This outperformance is due largely to Intuitive's wider range of procedural offerings but Intuitive has continued to expand product offerings, and has recently received FDA clearance for a new surgical stapling instrument. That could offset reduced interest in Intuitive's prostatectomy procedures. Medtronic's (MDT) forward P/E of 11 looks cheap by comparison, while Boston Scientific has a forward P/E of 12. On the other hand, Accuray (ARAY) has a high forward P/E of 223 because of low earnings.

Conclusion

Although some analysts have a buy rating on the company, I personally believe that it is fairly and fully valued at the present price of around $533. Investors should accumulate stock if there are any pullbacks in the current price. Current investors should hold onto stock that they already own.


jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Intuitive Surgical. Motley Fool newsletter services recommend Intuitive Surgical. 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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