Intuitive Surgical (ISRG) is a manufacturer and distributor of their proprietary robotic surgical systems. These systems provide a very strong value proposition for hospitals and other health care providers, which is discussed later. On July 8, 2013, Intuitive Surgical reported preliminary Q2 earnings results, ahead of its planned July 18th conference call. Shares of the company have moved lower by approximately 16% after the market open and are now trading near 52-week lows. Concerns from the pre announcement largely stem from the weak revenue, which is expected to be $575 Million for Q2 2013, a meager 7% increase from revenue in Q2 2012. While many companies would be glad to grow revenue at 7% per year, Intuitive Surgical has historically grown by higher rates than that and its valuation seems to imply a higher expected growth rate by the market. While Intuitive Surgical is now trading at around 21x 2014 earnings estimates, the sell-off presents a strong value opportunity for long term value investors, specifically considering Intuitive Surgical's historical valuation and growth rates.
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Razor/Razor Blade Model
Intuitive Surgical earns revenues from three different sources: service contracts, instrument sales and system sales. The company's primary system is the da Vinci surgical system, which can perform a multitude of different surgeries. The company sells the system to hospitals and other health care providers around the country and around the world. As surgeries are performed using the machine, surgeons use Intuitive Surgical's instruments. This, in addition to the annual service contracts, provide a constant cash flow for the company, which is very beneficial as over the long term they are able to earn a higher and higher percentage of revenue and earnings from these repeat sales as opposed to system sales. This gives the company a more stable source of revenue as systems sales have fluctuated quarter to quarter for a number of reasons.
While the da Vinci systems often represent a significant capital expenditure for hospitals and other healthcare providers, the can be very beneficial to both patients and the aforementioned operators of the systems. Advantages include smaller scarring on the patient as a result of the precision of the system and its operators, less blood loss due to smaller incisions and smaller and more precise instruments and shorter hospital stays due to both of the above. This is beneficial to healthcare providers, patients and society in the aggregate. The robotic surgery sector of the market has experienced tremendous growth in recent years and given Intuitive Surgical's dominant market position, they are set to benefit from this trend over the long term.
Despite Intuitive Surgical's earnings pre announcement and its somewhat disappointing result, the sell-off is vastly overdone and presents a strong opportunity for long term investors.