I simply can't get the hang of it. I've tried more than once to come to terms with it, but I simply cannot.
What is it that a company does that makes it worth $300+ per share?
I think about Apple, Inc. (AAPL) for instance, currently trading at close to $350, and I wonder just what is it that this company does that drives investors to pay that sort of money to own a single share of stock? And please don't talk to me about its technology, or its this or its that. A friend of mine has an Apple computer. The screen is wide and the keyboard is narrow, and I ain't impressed.
In the end, the company makes an overpriced touch screen that every tween, teen, and teen wannabe thinks they gotta have. End of story.
But is that any reason its stock should sell for $300+, or that investors should be willing to shell out that sorta dough to own it? What's wrong with that picture?
I was drifting across the Internet several weeks ago when I came across an article about another $300+ stock, Intuitive Surgical, Inc. (ISRG) -- only in this particular case I asked myself the question, Why?
Why, when so many Americans are struggling to find work, keep their homes, or simply keep their heads above water, do we celebrate a company whose Adjusted Operating Income for FY10 was 42%?
Okay, I can imagine that at this point, irritation my be starting to set in. You may even be starting to think that I am some sort of self-righteous, socially conscience investor, intent on saving the planet. Sorry, wrong guy. Before you all become incredulous, consider this. We all pay for these machines. That's right, that 42% operating income number? We, as in me and you, made that happen.
Basis
Financial information presented in this report for Intuitive Surgical, Inc., is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 01, 2011.
What Intuitive Does
The company designs, manufactures, and markets Da Vinci Surgical Systems, a computer-based surgical system that allows a surgeon to perform delicate surgical procedures while working through very small incisions. Using these computerized surgical systems is supposed to allow faster patient recovery and thus a return to normal activities much sooner than with a more traditional approach to surgery.
Short-Term Investment
The stock closed recently at $334.93 with Resistance at $393.92, an 18% increase from the recent close; First Support at $302.42, a 10% decline from the recent close; and Second Support at $299.93, an 11% decline from the recent close. Should the stock price fall beyond second support, the next support level is $246.05, a 27% decline from its recent price.
The stock price has been trending upward since the middle of December, recently recovering from an oversold condition.
While we are not short-term investors, it just seems to us that there isn't any reason to put $335 at risk in the hope of gaining $59 when there is greater potential to lose $89. But then, that's probably the reason we aren't short-term investors.
Long-Term (Five-Year Hold) Investment
Try as we might, we really couldn't find anything to complain about when it came to the company's financials. Its Current Ratio at 4.7, Quick Ratio at 4.2, and Cash Ratio at 3.3 were all well above what we consider investable limits.
Coupling those metrics with Simple Free Cash Flow of $8+ per share and no debt, it is certainly easy to understand the appeal of a long-term position, especially when these metrics are weighed against an estimated five-year growth in earnings of between 23 and 32 percent.
Valuation
Based on our review of the company's latest annual financial information, we think a Reasonable Value Estimate for the stock is between $85-$90, and based on that valuation have set a Buy Target of $52 per share, a First Sell Target of $102 per share , and a Close Target of $107 per share.
Based on a recent close of $334.93, the stock has a current PE of 34 and a forward PE of 26, telling us that the stock is simply too expensive. As such, we have no plans to add the stock to the Wax Ink Portfolio at this time.
Final Thoughts
Stocks that sell upwards of $300 may be rare; I have no idea and, to be frank, don't care. What is bothersome to me are the stocks that sell for these sums in sectors where it costs all of us.
Intuitive Surgical had a great year in 2010, and more than likely, assuming Obama does not change things too much, will have a great year in 2011. Were this a company that was not living off of the public teat, so to speak, I would be celebrating a 42% Net Operating Profit, since that is the way the free enterprise system works.
But the simple fact is that I pay for that 42% profit through higher medical insurance premiums, which leads to less spendable income for me, which leads to a lowered standard of living for me. Multiply me by the number of folks in the workforce that have insurance, and all of a sudden, paying for Intuitive's profits is being done by quite a few people.
So the next time you complain because your medical insurance premium has increased (an annual event for me), perhaps you will remember this article and take just a couple of seconds to ask yourself if Intuitive Surgical really needs to make a 42% profit to stay in business.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
