Intuitive Surgical's Wide Moat Ensures Solid Profits Ahead

| About: Intuitive Surgical, (ISRG)

Legendary investor Benjamin Graham loved "wide moat" companies. These are companies whose market share is protected by very high barriers to entry. These companies can be profitable for a long, long time and deliver superior results to shareholders over the years and even decades.

Intuitive Surgical (NASDAQ:ISRG) builds robotic surgical equipment, specifically the da Vinci System, which allows for minimally invasive surgical procedures and shorter recovery times for patients. They have a virtual monopoly in this space since no other company comes close to offering a similar product. This dominance grows stronger and stronger every year as more surgeons are trained on the da Vinci System and more hospitals commit their money to the device. Upstart Mako Surgical (NASDAQ:MAKO) offers robotic surgical equipment for knee surgeries and while it is an interesting company in its own right, Mako does not appear to be a threat to ISRG.

Despite this wide moat, shares of ISRG have been in free-fall over recent months, falling from a high of $393 in April, 2010 to a current price of about $265. The most recent earnings report [see transcript] was good, not great, but shares have suffered more than seems reasonable. Every company has a slow quarter now and then and even great companies like Intuitive Surgical will have their ups and downs. What might be spooking investors more than anything else is the economic troubles in Europe. Overall da Vinci System sales remain U.S. centric but Europe is a key growth market, which could disappoint in the upcoming quarter. With system sales flat quarter over quarter, it appears that this segment has slowed but the number that remains most important is the overall installed base.

ISRG now gets more than 50% of revenue from "recurring revenue" which is sales of parts and attachments used in surgeries. This side of the business should continue to grow as robotic surgery gains acceptance and expands to new procedures, and should represent a larger and larger share of revenues going forward. This might seem to be a concern for investors but it is exactly the business model the company has outlined in past reports and provides for a steady stream of revenue far, far into the future.

The explosive growth of years past may be leveling off but the business model is hitting on all cylinders. ISRG remains the clear leader in the fledgling field of robotic surgery and should benefit for decades, not just years from this dominant position. With projected annual growth topping 20% for the next five years, paying 30 times trailing earnings for ISRG seems like a steal. It's no longer the high flyer of the NASDAQ but the wide moat makes it virtually certain that Intuitive Surgical will continue to see good profits for a long, long time to come.

Disclosure: Long ISRG. No other positions