Intuitive Surgical: The Bull Case

| About: Intuitive Surgical, (ISRG)

Intuitive Surgical (NASDAQ:ISRG) has assisted in saving millions of lives with its surgical systems and instruments, but the safety of those products have come under fire. The company is set to report earnings on April 18 and it may cause a slight hit to earnings. I do not believe the claims are legitimate though, and the stock will once again soar to the high $500's.

The da Vinci Surgical System

Intuitive Surgical's most popular product is the da Vinci Surgical System, which costs about $1.5 million. The system provides a minimally invasive alternative to open surgery and laparoscopy. Minimally invasive means patients can have a major surgeries through tiny incisions, offering much quicker recovery. It also gives the surgeon better visualization, precision, dexterity, and control.

Negativity strikes

The safety of Intuitive Surgical's systems has been questioned after there was a rise in incident reports. A summary of the concerns can be found here. However, the reports are due to the change in reporting practices by Intuitive Surgical and nothing more. This fact has been overlooked in the media, but management reiterated this in a statement released on March 13.

A large percentage of the issues reported are malfunctions related to the instruments used, not the surgical system itself. Cable breaks are most common and this leaves an instrument non-functional. The problem can be fixed quickly by replacing the cable and this does not harm the patient. There have been zero injuries or deaths reported, but the negativity continued. This situation was blown out of proportion and has led to people questioning whether or not robotic surgeries are even necessary. For this, I turned to a more reliable source.

A source to trust

Dr. Joseph Boyer is one of the most respected surgeons in America and is a trained expert in da Vinci surgeries. In fact, he performed the first complete robotic cardiac surgery in Central Florida. I spoke with Dr. Boyer about the safety concerns of the da Vinci Surgical System, and he had this to say:

"Look, any time a new technology comes out like robotics there is an initial flurry of extreme interest. Then, people who want to do so, are inclined to criticize the technology on some basis: cost, efficacy, or safety. I think it's a very safe, effective tool to use for surgical procedures."

I trust Dr. Boyer's opinion and insight than any of the doubters. As an expert in his field and in the use of the da Vinci, he is much more educated in its safety than those who are new to the situation. Intuitive Surgical has cooperated with the investigation of its products and I believe the U.S. Food and Drug Administration will reiterate the safety and benefits of the systems.

Fourth quarter review

Fourth quarter results were released on January 22 and were a catalyst in sending the stock to its highs. It was an impressive quarter with growth on both the top and bottom line. Here are the highlights:

  • Earnings per share of $4.25 vs. estimates of $4.04
  • Earnings growth of 13.3% year-over-year
  • Revenues of $609.30 million vs. estimates of $584.36 million
  • Revenue growth of 22.7% year-over-year

This showed that Intuitive's systems were continuing to take share in the surgical market. The results came out prior to the safety concerns, so it was a short-lived rally. The fall began less than a month later.

Decline and rebound

From February 19 to March 15, Intuitive Surgical's stock fell from $582.27 to $459.44, a 21.1% decline. Since then, the stock has rallied to $507, but is still well below its highs.

(Click to enlarge)

First quarter expectations

Intuitive Surgical is set to release first quarter earnings on April 18. Currently, analysts project earnings per share to be $3.99, up from $3.50 a year ago. This would represent an increase of 14%. Revenue is expected to come in at $582.8 million, up 17.7% year-over-year. The company has beat earnings expectations the last four quarters in a row and I believe it can continue the streak. However, I would not begin a position before the report just in case new purchases slowed from the investigation into the safety of the systems.


Earnings per share estimate $3.99
Earnings per share increase year-over-year 14%
Revenue estimate $582.8 million
Revenue increase year-over-year 17.7%

Concluding thoughts

Intuitive Surgical is an innovative company with a bright future. Earnings appear attainable this quarter, but I do not recommend buying in beforehand. I would wait and see what management has to say and what their guidance is for the rest of the year. If the safety concerns have caused earnings to decline, I would then buy on weakness and add to the position if it were to continue to fall.

Disclosure: I am long ISRG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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