Intuitive Surgical: Growth Stock With Little Room For Error

| About: Intuitive Surgical, (ISRG)

Intuitive Surgical (NASDAQ:ISRG) is haptic to meet you. Employing haptics (the science of computer-aided touch sensitivity), the firm has developed the da Vinci Surgical System of software, hardware, and optics to allow doctors to perform robotically aided surgery from a remote console. The da Vinci system faithfully reproduces the doctor's hand movements in real time, with surgery performed by tiny electromechanical arms and instruments inserted in the patient's body through small openings. The company also makes EndoWrist surgical instruments for use with its system.

A couple of things caught my eye when I saw ISRG. First was the price. Not many stocks sell in the $200+ area. So I had to know how that happened. Second, during my research, I found that it had a reverse stock split in 2003, one that actually worked to the benefit of the company.

Since that split (at $18 a share), the stock has literally taken off, pausing briefly in 2006 before rocketing higher. Can it keep going?

There's one answer for that question: earnings. If it keeps delivering earnings, as it has over the last two years, this stock can go a long way. Still, those earnings have been erratic. In 2003, they were a negative 41 cents a share. Then they found daylight and were 67 cents a share. In 2005, they jumped to $2.51, only to dip down to $1.89 in 2006, hence the pause. With renewed vigor, eps are rebounding. Analysts are expecting $3.10 this year and $4.25 next year. They're predicting average annual growth of 28.5% a year over the next 5 years.

It's the da Vinci system that's taking the company to new heights. Demand is ramping to the tune of 50% growth in the top line this year, putting revenues at $560 million with expectations of $750 million next year. Analysts are looking for revenues to increase by 29.5% a year, on average over the next 5 years. Two versions of the da Vinci system, prostatectomy (dvp) and hysterectoromy are expected to grow by 65% and 175% respectively during 2007. Intuitive sells its products in Asia, Australia, Europe, and North America through both a direct sales force and independent distributors.

Dvp is becoming the industry standard for prostate cancers requiring surgery. Clinical studies show that the procedure is better than traditional surgeries. Dvp should do a little over half the prostate surgeries this year. Look for even better market share next year. The hysterectomy market has even larger potential. The company is only doing about 5% of those operations (about 250,000) currently.

Some good numbers: Net profit margin was 19.3% last year, expected to be 21.4% this year and 22.7% next year. Return on Equity was 12.2% last year with analysts looking for 14% this year and next. There is no debt on the books. Current assets outnumber current liabilities by 5 to 1 with $305 million in cash.

Some troublesome numbers: P/E is an astronomical 51. Price to Sales Ratio is in the stratosphere at 9.8.

Investors love this stock, absolutely love it. That means there's no room for error from management. If there's a quarter's earnings that misses expectations, this stock will break quickly unless there's a very good reason for the miss. But if earnings beat rising expectations, this is the kind of stock that will do even better as investors begin to think the sky is not the limit.