This Health Care Stock Isn't Out of the Woods

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

Over the past year, Intuitive Surgical (NASDAQ: ISRG) has been mired in a mix of controversy pertaining to the safety of its revolutionary da Vinci surgical robots. Reports first leaked throughout the media questioning the safety of the company’s surgical systems. In fact, CNBC did a detailed report that brought the issue to the forefront of the financial media.

At the time, those fears were not yet substantiated. It wasn’t clear that the fears surrounding the da Vinci systems would have a negative effect on Intuitive Surgical’s fundamentals. Unfortunately, those fears were in fact realized on July 9, when the company warned investors its second quarter sales will likely disappoint. After an 18% drop in one day, the market is clearly panicking. Is the pervasive fear accurate? Or does the collapse in Intuitive Surgical now represent a buying opportunity?

Things just keep getting worse

There was bad news across the board in Intuitive Surgical’s preliminary second quarter update. The company advised investors that sales growth would come in at about 7% year over year in the second quarter, which would be well below analyst expectations.

Moreover, the company stated its volumes of procedures performed by the da Vinci robots would be hit by slower growth in benign gynecological procedures, due to fewer hospital admissions and a trend towards more conservative treatments.

All told, the warning served as a shock to the market, which now likely believes Intuitive Surgical is finally feeling the effects of widespread doubt as to the safety and cost-effectiveness of its da Vinci robots.

Intuitive Surgical isn’t the only surgical device maker falling on hard times. MAKO Surgical (NASDAQ: MAKO) has had its own share of problems in recent quarters. The company is struggling to maintain profitability, even though it is reporting strong revenue growth.

To illustrate, MAKO reported 26% first-quarter revenue growth. However, MAKO was unable to turn a profit, losing nearly $10 million during the quarter, or $0.21 per share. This was worse than analyst expectations, which called for a net loss of $0.19 per share.

Not for the faint of heart

Intuitive Surgical used to be a favorite among investors for racking up double-digit quarterly sales and profit growth like clockwork. Investors long favored it and awarded it a valuation profile usually reserved for the market’s best growth stocks.

Now, skittish investors may be looking for a safer health care play. One such stock that shell-shocked investors would be wise to consider now is Johnson & Johnson (NYSE: JNJ), which has a massive product portfolio that does include medical devices.

Fortunately for investors, J&J has a broad product line that includes several well-known consumer brands, including Listerine and Band-Aids, which help solidify the company’s underlying results. Even under adverse economic conditions, J&J provides the slow-and-steady results that its investors certainly appreciate. That’s a big reason why the company is one of only four stocks to hold the coveted triple-A credit rating from Standard and Poor’s.

Moreover, Johnson & Johnson is perfect for more conservative investors because of its handsome dividend yield, which stands at approximately 3% at recent prices. That dividend has stood the test of time, serving as a testament to the company’s durability. J&J recently raised its dividend for a spectacular 50 years in a row.

Reports of demise are greatly exaggerated

To be fair, it’s not as if Intuitive Surgical’s business is in free-fall. The company is still expecting sales growth in the second quarter, albeit at a rate far below what the market had expected.

Moreover, Intuitive Surgical is still seeing growth from its instruments, accessories, and services divisions. In the meantime, for investors who aren’t afraid to take risk, the massive drop in Intuitive Surgical shares may present a unique buying opportunity.

After the sell-off, shares now exchange hands for 25 times full year 2012 diluted earnings per share, so it’s hard to say the stock is cheap. Further multiple compression is a very likely scenario, especially now that the company’s growth trajectory has been dealt a hit.

For the time being, I’m taking a cautious view on Intuitive Surgical. I’d advise investors to take a similarly cautious view and wait for the dust to settle before jumping in.

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Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical, Johnson & Johnson, and MAKO Surgical . The Motley Fool owns shares of Intuitive Surgical and Johnson & Johnson. 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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