A leader in the medical device industry, Intuitive Surgical, Inc. (NASDAQ:ISRG) has been trounced year to date by the Dow Jones Industrial Average, rising only 2.00% compared to the 16.41% return offered by the blue chip average.
Intuitive Surgical, Inc. (NASDAQ:ISRG) designs, manufacturers, and markets da Vinci Surgical Systems and related instruments and accessories. Based on market capitalization, the company is valued at $20.09 billion. Fundamentally, the company’s business model is extremely strong, with a TTM profit margin of 30.59%. So is this medical devices innovator a strong investment in the medical trends of tomorrow or should investors think twice before investing in this company?
Strengths:
1). Explosive Revenue Growth: In 2003, Intuitive Surgical, Inc. (NASDAQ:ISRG) reported revenue of $91.7 million; in 2011, the company announced revenue of $1.75 billion, representing year over year annual growth of 44.71%, an explosive trend which is highly anticipated to sustain into the future with projections placing 2017 revenue at $4.17 billion. This growth has been a result of the rapid adoption of the company’s main product, the da Vinci Surgical System.
2). Institutional Vote of Confidence: 90.38% of shares outstanding are held by institutional investors, displaying the confidence some of largest investors in the world the company and its future.
3). Net Cash Position: Intuitive Surgical, Inc. (NASDAQ:ISRG) does not possess any debt on its balance sheets, however holds $2.9 billion of cash and cash equivalents, or roughly $73 per share, a major financial strength of the company.
4). Strong Cash Flow: In 2011, Intuitive Surgical, Inc. (NASDAQ:ISRG) generated $542 million in cash flow, representing the company’s financial security and strength.
5). Innovative Advantage Over Competitors: Their main product, the da Vinci Surgical System, has been proved to stand head and shoulders above its competition as the product allows the surgeon to perform precise movements, and has been shown, to in studies, be more effective and safe for the person being operated on, and is being adopted as the highest medical standard.
6). Margin Expansion: Over the past decade, Intuitive Surgical’s TTM profit margin has expanded from negative territory in 2004 to the current level of 20.71%, an extremely advantageous trend.
Weaknesses:
1). Lack of Dividend: The company currently does not pay out a dividend and at no time in the past expressed any plans to do so.
2). Heavy Reliance on One Product: The wide majority of the company’s revenue is derived from the da Vinci Surgical System and related accessories and services; this heavy reliance on one product could prove to be a major weakness.
3). High Valuation: At the moment, the company possesses a price to earnings ratio of 29.39, a price to book ratio of 5.59, and a price to sales ratio of 9.17, all of which indicate a company trading with a high valuation.
Opportunities:
1). Implementation of Dividend: The company possesses a relatively large cash position, and could choose to implement a dividend in the future.
2). Increase in Average Selling Price of da Vinci Systems: Intuitive Surgical is consistently innovating their da Vinci Surgical System and improving it, which has led to the average selling price increasing from $1.34 million in 2008 to $1.51 million currently. Projections expect this trend to sustain into the future, presenting major opportunity for the company.
3). Growth in Number of da Vinci Systems Sold: In 2011, the company sold 1,548 systems in the US, 372 in Europe, and 212 in the rest of world, presenting incredible opportunity for further international expansion, especially in emerging markets such as China and Latin America.
4). Increased Adoption: Currently, the da Vinci Surgical System is utilized for a wide array of procedures, from operations that fight bladder cancer to endometriosis; however, there are still a huge plethora of illnesses that the da Vinci cannot be used for, and into the future Intuitive is dedicated to making the machine capable of conducting other procedures and thus potentially fueling sales.
5). Acquisitions: In January 2012, Intuitive Surgical acquired its Korean distributor, giving the company greater control over its supply chain; further acquisitions could introduce new and innovative technologies that the company could implement into their surgical system.
Threats:
1). Medical Device Tax: Starting in 2013, a 2.3% excise tax will be placed on the sale of medical devices, which will be applicable to Intuitive Surgical, cutting into profits.
Competitors
Major publicly traded competitors of Intuitive Surgical include Stryker Corporation (NYSE:SYK), Teleflex Incorporated (NYSE:TFX), MAKO Surgical Corp. (NASDAQ:MAKO), and Boston Scientific Corporation (NYSE:BSX).
Stryker Corporation (NYSE:SYK) is valued at $25.44 billion, pays out a dividend yielding 1.57%, and carries a price to earnings ratio of 20.58. Stryker’s core business is concentrated into three main segments, reconstructive, MedSurg, and Neurotechnology & Spine. The company’s products are sold in over 100 countries, and presently the company carries a TTM profit margin of 14.41%.
Teleflex Incorporated (NYSE:TFX) is valued at $3.20 billion, pays out a dividend yielding 1.75%, and carries a price to earnings ratio of 25.13. Teleflex offers single-use medical devices as well as aerospace products. Recently the company’s TTM profit margin has been volatile, with the metric dropping into negative territory before rising to the current 7.63% level.
MAKO Surgical Corp. (NASDAQ:MAKO) is valued at $560.50 million, does not pay out a dividend, and carries a negative price to earnings ratio. The company’s product portfolio includes MAKOplasty, a major product for the company. Fundamentally, MAKO’s business model is seriously flawed, as at no time in the company’s history has the TTM profit margin been positive; currently the metric sits at -28.22%.
Boston Scientific Corporation (NYSE:BSX) is valued at $14.59 billion, does not pay out a dividend, and carries a negative price to earnings ratio. Boston Scientific’s product portfolio includes offerings from the Interventional Cardiology segment to the Electrophysiology segment. Since the IPO of the company, its fundamental business has never been weaker, with currently the stock possessing a TTM profit margin of -63.47%.
The Foolish Bottom Line
Financially, Intuitive Surgical could not be stronger. The company possesses explosive revenue growth, the trend of margin expansion, and a net cash position. The only major weakness of the company is its extremely high valuation, however some of this premium is compensated through explosive growth. Looking forward, the company is likely to draw growth from increasing da Vinci sales numbers, and resulting accessories sales. All in all, Intuitive Surgical is an incredible growth play on the medical industry of tomorrow, however currently trades at a sky high valuation. Overall, Intuitive Surgical earns 4 out of 5 stars, and is a compelling buy on any considerable pullbacks which bring the valuation of the company to a more reasonable level.
Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical and MAKO Surgical (NASDAQ:MAKO) . The Motley Fool owns shares of Intuitive Surgical.
The article Capitalizing on the Medical Trends of Tomorrow originally appeared on Fool.com and is written by Ryan Guenette.
Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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