Intuitive Surgical (ISRG) is had a really bad quarter — the worst I think I’ve seen after covering the company for ten years. The big news is da Vinci system sales were down year-over-year. System sales were -6% last quarter, after being up between 17% and 24% the past five quarters. There are at least two reasons for this: hysterectomy procedure growth is slowing and the company got an FDA Werning letter (probably made hospitals hold off for now). Now ,da Vinci sales might not increase until 2015. That’s a long time from now. System sales are expected to decline around 25% or so the next couple of quarters. So -6% isn’t as bad as what lies ahead.
In the meantime, ISRG makes around half its revenue from replacement parts for existing robotic doctors that are already in use. So the company has a consistent revenue stream to fall back on. The problem now is ISRG is down, and is this the bottom or the beginning of long downturn?
One Year Chart
The stock got crushed five weeks ago and has shown no signs of momentum since. The P/E of 25 is fair considering the stock’s got recurring revenue each quarter from replacement parts.
Estimates show negative profit growth coming the next three quarters. What I don’t like is annual estimates just started to decline (from $18 to $16) and that could continue — I don’t know. There’s no certainty with these shares right now.
Fair Value
I’m taking my Fair Value P/E from 30 to 25, but provbably should have moved it even lower. There’s a risk this company could lower profit estimates again. Still, even after the fall, ISRG isn’t on sale.
Sharek’s Take
Intuitive Surgical is a fine company that will be a great buy at the bottom. The trouble is we don’t know where the bottom is. Right now ISRG isn’t on sale even thought its got all this bad news. Yes, this could be the bottom, but its tough to buy in at 25 times earnings when there’s no certainty.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
