The last time I reviewed Intuitive Surgical (ISRG), the da Vinci systems manufacturer, its growth had slowed, suggesting the company's high-octane PE was unwarranted. The short worked well: Intuitive fell 17%.
Since then, its share price has recovered half of its losses. Intuitive Surgical just announced its quarterly numbers beating earnings and revenue estimates slightly (0.9% and 0.6% respectively). The company experienced a decline in U.S. prostatectomy procedures but noted an increase in gynecologic and general surgery procedures. European orders slumped while Japanese sales were strong.
Buy, Sell or Hold?
Unfortunately, the five disturbing trends I noted in my last article are still in place, suggesting Intuitive Surgical will have trouble maintaining its still high 35 PE. While Intuitive Surgical has brought an innovative approach to oncologic surgery, it's too expensive considering its growth deceleration. Moreover, this quarter saw greater growth deceleration than in either of the first two quarters.
The Five Worrisome Trends
1. While procedures increased 22% over year-ago quarter, the rate of growth is decelerating. The trend of declining growth is troubling.
2. Unit sales growth is declining as European sales decrease and the U.S. becomes saturated.
3. Operating margins are hitting the wall. Although its margins are indeed extraordinary for a medical device maker, they look like they have stalled. Management indicates margins will rise to 40% next quarter from this quarter's 39.3%. The trend indicates that Intuitive Surgical is unlikely to squeeze more profits from sales. The company is going to need increasing sales to generate higher earnings.
4. Increasingly, Intuitive Surgical depends on recurring revenue. This quarter 57% of its revenues came from its installed base of da Vinci machines. This is a sign that Intuitive is changing from a growth story to more of a maturing business.
5. U.S. prostatectomies have declined as physicians move toward more conservative management of prostate cancers. This has been Intuitive Surgical's bread-and-butter. Intuitive Surgical expects to see supercharged growth in gynecologic and general surgery procedures. As yet, there has not been widespread adoption of robotics in gynecology and general surgery.
Intuitive Surgical is getting expensive again. I'd lean more to a short than long position here. The share price is getting ahead of the growth story.
(Graphs are sourced from 10Ks. 2012 is for third quarter only.)
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