Strong Growth Continues At Intuitive Surgical

| About: Intuitive Surgical, (ISRG)
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Surgical device maker Intuitive Surgical (ISRG) reported incredibly strong second quarter results late last week. Earnings surged 29% to $3.75 per share, easily exceeding the consensus estimate by $0.19. Revenue increased 26% to $537 million, which was slightly higher than the Street's expectations. Gross margins were 72%, flat year-over-year, but still healthy, in our view. Though the shares are fairly valued at current levels (click here for valuation report), we think the company has fantastic growth potential.

During the second quarter, the firm's instruments and accessories business performed exceptionally well, with revenue advancing 30% to $224 million. Intuitive Surgical noted that da Vinci surgical procedures continue to rise in popularity, due to its minimally invasive characteristics and value in aiding surgeons. Procedures grew 26% year-over-year, and we think continued adoption of da Vinci and aging demographics should favorably impact this segment for years to come. Though prostate operations are declining as a result of "changes in disease management" (new prostate cancer drugs), strong growth continues for other procedures.

Systems sales also performed nicely, growing 23% during the second quarter to $229 million. The company sold 150 da Vinci Surgical systems in the period, up from 129 during the same quarter last year. International growth continues to lag the US, growing 16% to $101 million. However, we think this just means there is more potential for international growth in the future.

In addition to strong revenue growth, the firm generated tremendous cash flow. During the second quarter, operating cash flow totaled $217 million, leaving the company with $2.6 billion in cash on its balance sheet. Without much cash needed for incremental investments, the company continues to have healthy amount of cash authorized to repurchase shares at favorable levels. Only $15 million in stock was repurchased during the second quarter, but we expect management to repurchase shares if the stock gets cheaper.

Although several companies have reduced guidance this earnings season, Intuitive Surgical increased its revenue guidance to 20-23% from 19-21%. The firm didn't increase its operating margin guidance of 39-40%, but that could prove to be conservative. Healthcare spending is fairly resilient to macroeconomic headwinds, so we do not see tremendous downside risk in the event of a global economic slowdown. Though we think shares of the da Vinci maker are fairly valued at current levels, we may look to opportunistically add a few shares to our position in our Best Ideas Newsletter portfolio.

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

Additional disclosure: ISRG is included in the portfolio of our Best Ideas Newsletter.