Has Intuitive Surgical's Stock Been Fairly Slashed Down?

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

Do the words lackluster, plunges, slumps, or weak define $575 million in net revenues for a quarter? Well, apparently they do according to Wall Street analysts following Intuitive Surgical (NASDAQ: ISRG) after the designer and manufacturer of the da Vinci Surgical Systems line of medical instruments gave a lower than expected outlook last week. Its guidance falls below the $630 million expected from Wall Street, even though it is still a 7% increase year-over-year on a product that has been on the market since 1999.

To truly judge where Intuitive Surgical is today, one should look at the trend the past 5 years. The company’s prediction for $160 million in net earnings, prior to the official second quarter earnings announcement on July 18 is up 3% from the same quarter a year ago. In fact, quarterly revenue has gone up from $236 million (2008) to $611 million (March, 2013) with an average of $394 million during that time frame. Likewise, predicted net income is much higher than the 5 year average of $109 million.

So has Intuitive Surgical’s stock been slashed down unfairly? Even if you disregard the $80+ price drop seen last week, the stock was already down considerably from its $585 highs seen in January.

<img alt="" src="http://media.ycharts.com/charts/c3578b5dac4a6193d3c26ec7620e83f5.png" />

ISRG Total Return Price data by YCharts

Does this coffee stock foreshadow?

Although unrelated by industry, Green Mountain Coffee Roasters (NASDAQ: GMCR) as a stock had similar performance based on criticism within their industry and by having earnings fall short of high expectations. Soaring to its still all-time peak price of $100+ in 2011, the Keurig creator met doubters from the likes of David Einhorn. Even though Green Mountain in November of 2011 reported quarterly profits that tripled on higher revenue, shares still plunged 34% the same day. The reported reasons were missed company forecasts, Wall Street targets, and competition.

Year-to-date, Green Mountain is up 65%, and for the past 12 months, the stock has soared over 210%. Despite the stock tanking 80% between September 2011 and July 2012, the company has made up 45% of that loss and is still climbing although the stock is said to be facing competition from other companies creating their own single brew design. In this aspect, Green Mountain shares a few similarities with Intuitive Surgical.

First, both companies have a unique product that has set the standard within their own industry – Green Mountain’s Keurig single-cup brewing system and Intuitive Surgical’s da Vinci Surgical System. Green Mountain is said to face competition from the likes of Starbucks while Intuitive Surgical is said to compete with smaller medical device firms like MAKO Surgical.

Financially, both Intuitive Surgical and Green Mountain have still been consistently improving earnings, net income, and overall market share. Green Mountain’s sales growth by percentage has been dropping in recent years going from 59% in 2009, to a peak of 95% in 2011, to a predicted forecast of 15% for 2013. Nevertheless, 15% is still considerable growth as the company, like Intuitive Surgical, continues to modify and improve their main products and issue new innovations to the marketplace.

So what is a fair downgrade?

If both Intuitive Surgical and Green Mountain are examples of companies whose stocks have been unfairly slashed now or in the past, then what is an example of a company that has been fairly downgraded? BlackBerry (NASDAQ: BBRY) is a great example when you consider what has happened or not happened for the mobile phone provider.

The stock has plummeted over 95% from its historic highs 6 years ago, as the market place for smartphones has changed completely. There are many reasons for the huge decline but many of them have to do with the company’s missteps in judging the smartphone market and what consumers want(ed). For the most part, BlackBerry 10 delays cost the company its ecosystem, support lines, and customers as impatience had users moving onto iOS and Android competitors.

U.S. market share is currently estimated to be a dismal 1% and last month just 2.7 million of the new phones were shipped – over 1 million below expectations. The lack of support and the obsolete designs have put the company in limbo over the next play as the physical keyboard – a trademark of the BlackBerry design – has prevented the company from creating phones that meet screen size, aesthetic, and app requirements of consumers.

Final thoughts – defining opportunity

Investor’s – both old and new – don’t take the time to analyze what is actually happening when a company’s stock declines rapidly. Any stock that ‘plunges’ on weak outlook is instantly labeled with downgrades or at the very least "the good days are over." There is a difference.

While Intuitive Surgical, and similarly, Green Mountain are seeing slower growth with their current products, that doesn’t eliminate the other possibilities for each company that include expansion, improvements, predictable cash flows for product support, and global growth. It also doesn’t eliminate the other key variable – adoption of product or the opportunity.

What you don’t hear in the headlines are that procedures for Intuitive Surgical increased 18% for the quarter, instrument revenues are expected to go up 18%, annual procedures are over 200,000 for the U.S. alone, worldwide revenues are increasing 25% on a year-over-year basis, and the most important number of all – 6303. Growing monthly, unlike support for BlackBerry, is the support for the da Vinci system. 6303 is the number of trials, studies, and publications that to this day that validate the product as an asset to the medical community. This makes Intuitive Surgical an opportunity.

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Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Intuitive Surgical. The Motley Fool owns shares of 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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