Although Intuitive Surgical (ISRG)'s stock is trading at premium multiples, we believe the spectacular performance shown by the company over the years, bolstered by its strong revenue and EPS growth, justifies the high multiples at the moment. Analysts remain optimistic about the company's future earning-generation capability, and assign it a high growth rate (of 20%). We strongly believe the company has a winner in the form of its technological advanced surgical robot, da Vinci Systems, and remain positive that the passage of time will open doors to more procedures; thereby, providing the company with more market access. Da Vinci was a breakthrough technology in the treatment of gynecological disorders and prostate cancer surgeries, and has made inroads into other procedures such as head and neck surgeries and cardiothoracic. We foresee sustained growth for the company, and rate the stock a buy.
Intuitive Surgical, a leader in robotic-assisted minimally invasive surgery (MIS), is the innovative company that manufactures the da Vinci Surgical Systems, and the accompanying accessories. First approved in 2000, the da Vince Surgical Systems essentially translates a surgeon's manual maneuvers into micro movements of instruments that are positioned inside the patient through small ports. ISRG generates revenue both at the initial sale of the da Vinci unit (which sells for between $1 and $2 million), and then later through accessories and services. Recurring revenue has increasingly become a major source of the company's income stream, and now accounts for almost 58% (for the first half of 2012) of total revenues. Europe had been a headwind for the results, and the quarter saw a decline in the number of procedures performed, owing to the declining spending against the backdrop of a tough economic environment.
The total number of da Vinci Systems installed worldwide is 1,840 in 1,450 hospitals. The surgical robots are popular with hospitals, since they greatly reduce the recovery time for patients, resulting in shortened hospital stays. This leads to much-needed cost savings for hospitals. Studies have linked the use of the da Vinci robots to open hysterectomies with less blood loss, lower rates of post-operative complications, and much lower readmission rates for patients having prostatectomies.
Revenues for the second quarter of 2012 stood at $536.5 million, up from $425.7 million for the same quarter last year. The increase was largely attributable to increased sales of da Vinci Systems, driven by growth of gynecological procedures, dVH, sacrocolpopexy, endometriosis resection and general surgery growth in the U.S. Geographically, the U.S. is the largest revenue income source, since it generated 81% of total revenues for the second quarter of 2012, which also means that the company has enough room to expand internationally. ISRG posted EPS of $3.75, against consensus analyst estimates of $3.56, representing a 5.3% surprise. It also raised its FY2012 revenue guidance to $2.135b.
The stock currently trades at 29x its forward 2013E earnings, and has yielded a one-year return of 30.67 %. The stock dropped after the earnings announcement on July 19, 2012. Many have come to the conclusion that the stock is trading at a premium, and is not justified at the current levels (it trades at 36x its trailing earnings). But we believe that trading at lofty valuations is the norm for Intuitive Surgical, for the obvious fact that it has what it takes to justify such premium valuations; namely the ability to innovate and sustain earnings. Let's stick to the five-year timeframe, and look at how the stock and the company have performed.
Chart 1: P/E Multiple and Price
For the past five years, the company's trailing P/E multiple has ranged between a high of 87x and a low of 20x, with an average of 44x. Concurrently, the stock has moved up by 126% for the same time period. The stock has a history of soaring up, despite trading at expensive multiples. Why? Because ISRG has managed to phenomenally boost its earnings, which are now three times of what they were five years ago. It regularly beats analyst estimates and keeps investors interested.
Chart 2: EPS TTM
In fact, we believe the da Vinci will be adapted for more procedures with the passage of time. The technology created by Intuitive System is such a breakthrough that even NASA might find a use of it by adapting the system to repair orbiting satellites in space.
On its balance sheet, the company has no debt and the current ratio (mrq) of 4.9x represents its strong position to meet its short-term liabilities. The estimated PEG ratio is 1.67; analysts expect a long-term earnings growth rate of 20%. Analyst mean price target is $582. In light of the promising performance by the company, we rate the stock a buy.
Note: Graphs are sourced from YCharts.com
Disclaimer: The article has been written by Qineqt's Healthcare Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article