Intuitive Surgical: A Good Long-Term Growth Play?

| About: Intuitive Surgical, (ISRG)

"Histories make men wise; poets, witty; the mathematics, subtile; natural philosophy, deep; moral, grave; logic and rhetoric, able to contend."

Francis Bacon

Intuitive Surgical, Inc. (ISRG) produces, designs and markets da Vinci Surgical Systems for various surgical procedures, some of which include gynaecologic, urologic, cardiothoracic, and other uses. The system consists of a surgeon's console, a vision system, a patient side cart, an fluorescence imaging product, da Vinci skills simulator and proprietary wrested instruments. The system essentially translates a surgeon's hand movements into corresponding movements of instruments positioned inside the patient through small incisions of minimally invasive surgery.

We like Intuitive Surgical for many reasons, three of which are:

It issued positive guidance for 2012. Total procedure count is expected to increase between 24%-26% in 2012. Revenues are expected to increase by 17%-19% in 2012.

Recurring revenues continue to grow as a proportion of total sales. They increased 30% in fiscal 2011 and accounted for 56% of total revenues during the year.

It operates in a niche market and has no direct competition. It acquired its only threat, Computer Motion, in June 2003. It also sports operating margins of 39% and profit margins of 29%.

Reasons to be bullish on Intuitive Surgical:

  • Net income has increased from $233 million in 2009 to $495 million in 2011.
  • EBITDA has increased from $431 in 2009 million to $756 million in 2011.
  • Cash flow per share has almost doubled from $7.30 in 2009 to $13.89 in 2011.
  • A good earnings growth rate of 24.8%.
  • A strong revenue growth rate of 27.6%.
  • Gross profit has surged from $751 million in 2009 to $1.27 billion in 2011.
  • A long-term debt to equity ratio of 0.00.
  • It has a very strong balance sheet. Cash and Cash Equivalents have increased from $221 million in 2009 to $465 million in 2011.
  • It has a good levered free cash flow of $509 million.
  • It has a five year sales growth average of 35%.
  • Analyst's High estimates for EPS are $15.04 for 2012 and $17.39 for 2012.
  • Annual EPS before NRI has almost increased by 232% from $3.70 in 2007 to $12.32 in 2011.
  • It sports excellent current and quick ratios of 4.57 and 4.22, respectively.
  • Cash flow from operating activities has increased from $392in 2009 to $677 million in 2011.
  • It sports a decent ROE of 21%.
  • Operating income is projected to rise in the range of 39%-40%.
  • $100K invested for 10 years would have grown to $2.3 million.

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Many key ratios will be covered in this article and investors would do well to get a handle on some of the more important ones which are dealt with below.

Long-term debt-to-equity ratio is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balance sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long-term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase, the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt. The cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders than they are making. This situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for some time. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever. If your tolerance for risk is a low, look for similar companies with the same or higher yields but with lower payout ratios. Individuals searching for other ideas might find this article to be of Reasons To Be Bullish On Acacia Research Corporation.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa. Lower ratios are generally more attractive. If a company generated $400 million in cash flow and then spent $100 million on capital expenditure, then its free flow is $300 million. If the share price is $100 and the free cash flow per share are $5, the company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry. This gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at a higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to. Additional key metrics are addressed in this article - 5 Covered Writes: 2 Excellent, 2 Good And 1 Middling.

Intuitive Surgical

Levered Free Cash Flow: 509.35M

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Growth

  1. Net income for the past three years
  2. Net Income 2009 = $233 million
  3. Net Income 2010 = $382 million
  4. Net Income 2011 = $495 million
  1. EBITDA 12/2011 = $756 million
  2. EBITDA 12/2010 = $613 million
  3. EBITDA 12/2009 = $431 million
  1. Total cash flow from operating activities
  2. 2009 = $392.2 million
  3. 2010 = $545.8 million
  4. 2011 = $677.6 million
  1. Cash Flow 12/2011 = 13.89 $/share
  2. Cash Flow 12/2010 = 10.75 $/share
  3. Cash Flow 12/2009 = 7.3 $/share
  1. Annual EPS before NRI 12/2011 = 12.32
  2. Annual EPS before NRI 12/2010 = 9.47
  3. Annual EPS before NRI 12/2009 = 6.23
  4. Annual EPS before NRI 12/2008 = 5.12
  5. Annual EPS before NRI 12/2007 = 3.7

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Performance

  1. ROE = 20.77%
  2. Return on Assets = 17.96%
  3. Quarterly Earnings Growth = 24.8%
  4. Quarterly Revenue Growth = 27.6%
  1. Key Ratios
  2. Price to Sales = 11.95
  3. Price to Book = 7.81
  4. Price to Tangible Book = 8.54
  5. Price to Cash Flow = 38.14
  6. Price to Free Cash Flow = 35.3
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  1. Current Ratio 09/2011 = 4.57
  2. Current Ratio 5 Year Average = 4.7
  3. Quick Ratio = 4.22
  4. Cash Ratio = 3.3
  1. Total return last 3 years = 425.48%
  2. Total return last 5 years = 374.38%

Related companies

For investors looking for other ideas some data have been provided on four additional companies to get you started. Related companies data obtained from barchart.com.

Hologic Inc. (HOLX)

Levered Free Cash Flow: $506 million

Net income for the past three years

Net Income 2009 = $ 2.2 billion

Net Income 2010 = $-62.8 million

Net Income 2011 = $157.1 million

Total cash flow from operating activities

2009 = $550 million

2010 = $456 million

2011 = $ 456 million

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Gross Profit

2009 = $857 million

2010 = $ 736 million

2011 = $ 923 million

5 year sales growth = 23.9%

Total return 3 year average = 59%

Current Ratio = 2.2

Quick Ratio = 2.8

Long term debt to equity= 0.51

Interest Coverage = 3.2

Fresenius Medical Care AG & Co (NYSE:FMS)

Levered Free Cash Flow: 684.74M

Net income for the past three years

Net Income 2009 = $965 million

Net Income 2010 = $1065 million

Net Income 2011 = $1177 million

Total cash flow from operating activities

2009 = $1.34 billion

2010 = $1.37 billion

2011 = $1.45 billion

Cash Flow 12/2011 = 5.42 $/share

Cash Flow 12/2010 = 4.97 $/share

Cash Flow 12/2009 = 4.61 $/share

Annual EPS before NRI 12/2011 = 3.54

Annual EPS before NRI 12/2010 = 3.25

Annual EPS before NRI 12/2009 = 2.99

Annual EPS before NRI 12/2008 = 2.79

Annual EPS before NRI 12/2007 = 2.43

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ROE = 13.07%

Quarterly Earnings Growth = 14.4%

Quarterly Revenue Growth = 4.9%

Current Ratio 09/2011 = 1.34

Current Ratio 5 Year Average = 1.39

Quick Ratio = 1.11

Cash Ratio = 0.45

Interest Coverage 09/2011 = 6.08

Navidea Biopharmaceuticals, Inc (NAVB)

Levered Free Cash Flow: $-8.2 million

Net income for the past three years

Net Income 2009 = $ -39.6 million

Net Income 2010 = $-49.9 million

Net Income 2011 = $5.6 million

Total cash flow from operating activities

2009 = $-1.4million

2010 = $- 5.1 million

2011 = $ -16 million

Gross Profit

2009 = $N/A

2010 = $ 617 million

2011 = $ 598 million

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5 year sales growth= -25%

Total return 3 years= 520%

Current Ratio = 8.69

Quick Ratio = 9.00

Long term debt to equity = 0.31

Interest Coverage = N/A

Varian Medical Systems, Inc. (NYSE:VAR)

Levered Free Cash Flow: 301.75M

Net income for the past three years

Net Income 2009 = $319 million

Net Income 2010 = $360 million

Net Income 2011 = $399 million

Total cash flow from operating activities

2009 = $304.44 million

2010 = $460.79 million

2011 = $472.78 million

Cash Flow 12/2011 = 3.94 $/share

Cash Flow 12/2010 = 3.42 $/share

Cash Flow 12/2009 = 3 $/share

Annual EPS before NRI 12/2011 = 3.44

Annual EPS before NRI 12/2010 = 2.96

Annual EPS before NRI 12/2009 = 2.65

Annual EPS before NRI 12/2008 = 2.31

Annual EPS before NRI 12/2007 = 1.85

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ROE = 29.95%

Return on Assets = 15.99%

Quarterly Earnings Growth = -6.5%

Quarterly Revenue Growth = 7.8%

Current Ratio 09/2011 = 1.75

Current Ratio 5 Year Average = 1.83

Quick Ratio = 1.28

Cash Ratio = 0.72

Interest Coverage 09/2011 = 158.61

Conclusion

The markets are still extremely overbought and rising on low volume. Investors would do well to wait for a strong pullback before committing large sums of new money to this market.

Disclaimer

This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: EPS, EPS surprise, broker recommendations and price and consensus charts sourced from zacks.com. A significant portion of the historic data was obtained from zacks.com. Consensus estimate analysis table sourced from reuters.com. Free cash flow yield, income from cont operations and revenue growth sourced from Ycharts.com.