This Health Care Stock Is Rapidly Approaching Buy Territory

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Health-care stock Intuitive Surgical (NASDAQ: ISRG) used to be a favorite among growth investors just a few quarters ago. The company grew sales and profits at double-digit rates like clockwork and had a soaring share price reflecting its outstanding results.

All that has changed, and the good times seem like an eternity ago. The company’s newly released quarterly results confirmed what investors had feared about the state of its da Vinci surgical robots, and the market has taken a scalpel to Intuitive Surgical shares in reaction. Here’s why shares are rapidly approaching bargain territory, and why Foolish investors should get their buy orders ready.

Dour results should not have been a surprise

Intuitive Surgical just last week gave investors fair warning that this quarter’s results would be poor. There was bad news across the board in Intuitive Surgical’s preliminary second quarter update.

In fact, the actual results weren’t as bad as feared from a revenue standpoint. Total revenues clocked in at $578 million, slightly above the company’s previously lowered guidance. Unfortunately, earnings per share missed analyst expectations, coming in at $3.90 per share.

All told, both revenue and earnings per share represented year over year growth, albeit single digit growth. The quarter’s results broke a four-year streak of double digit growth.

One new piece of information in the company’s earnings release was the revelation that the Food and Drug Administration warned Intuitive Surgical about the state of one of its facilities. That being said, Chief Executive Officer Gary Guthart was not at all concerned by the FDA’s warning, stating that the problem was under control and would be addressed.

Not for the faint of heart

When I previously wrote about Intuitive Surgical, I recommended risk-averse investors interested in the health care sector look to Johnson & Johnson (NYSE: JNJ) as a suitable alternative to the heightened risk profile of Intuitive Surgical. J&J has considerable medical devices operations, and also holds a slew of pharmaceutical and consumer health care brands that serve to solidify the company’s results.

Moreover, J&J is the gold standard among dividend payers. Whereas Intuitive Surgical does not pay a dividend to shareholders, J&J has a dividend track record that is tough to beat. J&J recently raised its dividend for the 50th consecutive year, and the company’s current yield stands near a healthy 3%.

In addition, the company’s financial position adds a margin of safety for skittish investors. J&J is one of only four U.S.-based companies to hold the coveted triple-A credit rating from Standard & Poor’s.

Alternatively, investors who don’t mind taking risk who’d like to stay in the surgical arena could consider MAKO Surgical (NASDAQ: MAKO). MAKO is a close competitor to Intuitive Surgical and hasn’t been beaten down quite as severely this year.

At the same time, however, MAKO has its own problems, namely the struggle to maintain profitability. To illustrate, MAKO reported 26% first-quarter revenue growth, a very strong number. 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.

A bump in the road, or something more serious?

In all, Intuitive Surgical is expecting sales this year to be flat to up 7%. That’s well below the 15% sales growth analysts were expecting, but it still represents growth. It’s not as if the company’s business is in decline.

Not every company gets everything right every quarter. At this point, investors need to judge whether lower-than-expected growth this year is worth a 36% haircut from where the stock was trading just a few months ago.

In my last piece about Intuitive Surgical on July 10, I warned that further multiple contraction was likely after the company’s earnings report. I was not expecting another $50 per share to the downside, and as a result, my position is the sell-off is now overdone.

Consider that Intuitive Surgical’s valuation is much more compelling than it seems. Its current valuation, 21 times trailing earnings, stands in stark contrast to its own historical valuation. The stock exchanged hands for 40 times earnings as recently as last year. Granted, growth will disappoint this year, but these are short-term issues.  Quite simply, Intuitive Surgical's da Vinci robots remains a revolutionary technology.

Moreover, it needs to be stated that investors are irrationally ignoring the fact that Intuitive Surgical realized 18% revenue growth in its biggest operating segment, instruments and accessories. Not only that, despite the widespread fear, volume of da Vinci surgical procedures still grew 18% in the quarter, year over year.

Clearly, there is immense value in this business that the market is not taking into consideration at all. At some point, the storm clouds will pass, and investors will wish they had pounced on the opportunity they’re getting. I will purchase Intuitive Surgical under $370 per share as soon as I am able to, and would advise my fellow Fools to do the same.

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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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