First off, I want to tell you I’m very familiar with shares of Intuitive Surgical (ISRG). I’ve followed the stock for almost ten years. I originally bought it for clients at $29 on October 27, 2004 at $29 and have covered the company every quarter since. I recently sold ISRG November 14, 2012 at $525 because it was fairly valued. On December 19th, 2012 ISRG opened at $547 and then closed at $515 after Citron Research posted a bearish research report about the company. I follow Citron Research and have agreed with their analysis in the past. ISRG closed 2012 at $490.
Then on January 23, 2013, after ISRG reported earnings, the stock popped from $518 the day before to $567. The bears got caught in a short-squeeze. Now with the stock at $574, here’s my analysis on where ISRG goes from here.
One Year Chart
The pop in the stock caused ISRG to break out of a six-month choppy base. But note profit growth was only 13% last quarter. Meh. For a stock with a 33 P/E, that’s not much profit growth.
The good news is revenue growth was 23% last quarter. da Vinci system revenue climbed 18% and instrument revenue (replacement parts) grew 29%. There were 175 da Vinci’s sold last quarter, up from 152 a year ago. Parts are now 57% of sales, and this is a safe recurring revenue stream. Procedures were up 25%, thats’ a key number because the more procedures, the more parts are needed.
Fair Value
Since instrument sales/procedure growth was in the high-twenty-percent range, I feel ISRG is deserving of a 30 P/E. This $574 stock is worth $529.
Sharek’s Take
I like ISRG as a moderate grower, but its not the 30% grower I’m used to seeing. ISRG’s 35% profit growth used to earn the stock a 42-45 P/E. Profit growth is expected to climb to 24% two quarters from now, and be 20% three quarters out. If ISRG beats we could see 30% growth again. But right now profit growth is in the teens and I feel the stock is as high as it should be.
ISRG is on my radar and would be a good buy if it gets to the bottom of its last range — $480 — which would be 27 times earnings.
View the Earnings Table here.View the Ten Year Chart here.
