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Intuitive Surgical (ISRG) is an old favorite of momentum hounds. From Q1 of 2003 to Q3 2008, the company was the Joe DiMaggio of Wall Street, beating estimates for 23 straight quarters by pretty whopping margins.
In fact, the streak was probably longer than that, but I don't have access to the data.
But the good times stopped rolling on January 7, 2009. The company preannounced preliminary Q4 results that were below expectations, with CEO Lonnie Smith making the following statement:
Our system sales in the quarter reflect the challenging global economic and financial market environment. At this point, we believe that uncertainty in global economic markets will make forecasting system placements difficult into 2009. Procedure growth remained strong worldwide. We continue to believe that procedures are the leading indicator for the strength of our business.
And what happened this morning? The company dramatically missed earnings and revenue expectations due to "$20.1 million of revenue deferrals associated with offers made to certain customers to upgrade their recently purchased da Vinci(r) S(tm) Surgical Systems to our recently announced da Vinci(r) Si(tm) Surgical System."
$20.1 million? Is there a reason they decided not to announce this important piece of data sooner?
It's time to face facts. The ISRG party is over.
Take a look at this chart, which measures ISRG's actual earnings relative to estimates. See the trend into negative territory? Failing to beat expectations is the absolute death's knell for any momentum stock, and ISRG has now missed twice in a row.
Momentum stocks are built around consistent earnings beats, and it's obvious that ISRG's best days are behind it. It is simply not delivering the big quarters, and the economy is hurting demand for its innovative, but expensive surgical systems.
And don't count out the psychological impact of the revenue deferral. It doesn't matter one bit if it all gets recognized by the company this year. Investors hate anything that makes analyzing a company's financials more difficult - just take a look at what a mess Electronic Arts' (ERTS) numbers are with those nonsensical revenue deferrals.
Just be careful when you get those analysts' reports reiterating Buy recommendations, with lowered earnings estimates. I've been a sucker myself for momentum stocks that lost their juice - in fact I still have nightmares about Rackable Systems (RACK), GFI Group (GFIG), and the big Daddy of them all, Zoltek (ZOLT).
Don't be as dumb as I was.
Tune out the spin, because ISRG is toast..
(disclosure: no positions in any names mentioned)
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This article has 31 comments:
Intuitive Surgical is acting on a market with no competitor. Their product and brand has great value.
But due to the credit market crisis, Hospital cannot purchase as much Da Vinci product as they would like (don't forget the price) but over the long term, their product clearly has a great market growth potential. Look at the margin too.
The management is doing a great job of securing any new technology or patent with their R&D or their strong balance Sheet to keep their huge competitive advantage.
I do believe that ISRG is just hit as a momemtum stock because the overall market is in a bear market; Don't try to make as if you are predicting the end of the momemtum stock, it is just a bear market that hit every stock (including momemtum stock that takes a big hit in their P/E ratio).
Over the long Term, ISRG is a great stock to hold because :
- Market growth potential
- Competitive Advantage
- Huge Growth Margin
- Solid Balance Sheet
- Solid Management
- Ability to continue to keep their competitive advantage
- The future effect of the unfreeze credit market
- The prospect of upgrade of technology in the Hospital
:)
It is all about Fundamental after all, and Intuitive Surgical has huge fundamentals.... :)
When the company was just beginning its growth phase, it suggested that the maximum any institution would buy would be 3 machines, but they now have two customers with 5. This technology, a monopoly, is becoming the gold standard. The company continues to plow its massive profits back into R&D, and the returns on its investment continue to be massive.
I sold my stock earlier this week between 114 and 120. I had hoped to buy it back before they reported, but the snafu of the early release got in my way (luckily I think, given the drop in AH). I plan to be buying the dip this morning. I bought for the first time in years when they reported in January, but I first became involved in the name in early 2005 and have nothing but the highest respect for this management team and their mission.
On Apr 17 06:52 AM Alan Brochstein wrote:
> I don't agree with you either. In addition to the previous comments,
> I would point to several facts, including massive 60% procedure growth,
> strong international demand, continued innovation (the reason for
> the deferrals), steady pricing, great cashflow, continued outside
> leasing sources, high repeat purchases on the systems and steady
> margin guidance despite uncertainty on volumes.
>
> When the company was just beginning its growth phase, it suggested
> that the maximum any institution would buy would be 3 machines, but
> they now have two customers with 5. This technology, a monopoly,
> is becoming the gold standard. The company continues to plow its
> massive profits back into R&D, and the returns on its investment
> continue to be massive.
>
> I sold my stock earlier this week between 114 and 120. I had hoped
> to buy it back before they reported, but the snafu of the early release
> got in my way (luckily I think, given the drop in AH). I plan to
> be buying the dip this morning. I bought for the first time in years
> when they reported in January, but I first became involved in the
> name in early 2005 and have nothing but the highest respect for this
> management team and their mission.
On Apr 17 08:05 AM wobatus wrote:
> Thw writer sounds like a jilted momo investor. I never bought. Was
> tempted when it was below 100. Thinking about it now.
On Apr 17 06:56 AM Alan Brochstein wrote:
> One more thing - it is quite rare to be able to talk about a growth
> company at this phase of its life-cycle on a free cash yield basis.
> I urge you and other readers to take a look at the free cash flow
> relative to the enterprise value. It's a joke.
On Apr 17 09:31 AM Michael Comeau wrote:
> If the company is so great - why would you sell the stock?
On Apr 17 09:32 AM Michael Comeau wrote:
> The company is obviously at a slowing stage of its lifecycle.
ZOLT will be the next stock in your article to take off!!!
...gosh, closed up $12.35...well, good thing egg and toast goes toether so well...LOL!
On Apr 17 03:08 PM Michael Comeau wrote:
> For the record, I feel the egg on my face. But I'm sticking to my
> guns...
And by the way me i didn t sold my shares and i m more then happy when i see the jump.
When The market will be in a bull mode (which is not the case now even with this rally) This stock will go back to his all time highs.
I m not a trader so my position are only based on long term fundamental, i apply real buy and hold.... and it pays really well and ISRG is one of the major stock i hold for the long term. I waited to see it dip below 120 i was enough lucky to pick it below 100..... now i plan to hold it for a LONG time
On Apr 17 09:32 AM Michael Comeau wrote:
> The company is obviously at a slowing stage of its lifecycle.
Remember this Michael Comeau character and do the opposite. He belongs in the Bozo Bin.
Watch for the heart business to go into orbit. Research Catholic Hospital in Tyer Texas. JMHO
Buying now is buying a growth stock, not a momentum stock.
On Apr 17 09:31 AM Michael Comeau wrote:
> Yes, I am jilted. But I'm learning from my screw-ups...