Intuitive Surgical Is On A Roll (ISRG)

| About: Intuitive Surgical, (ISRG)

I've been very pleased with Intuitive Surgical's (NASDAQ: ISRG) recovery in the market over the last month or so. After bottoming out in the weeks following their great earnings release (and the unexpectedly low first half guidance for 2006), the shares have now bounced back to well above my highest buy price.

For those who didn't follow my relentless chasing of ISRG as it climbed up the chart, I made purchases at $69, $89 and $109, and later bought on the earnings dip at $112 ... my average cost per share is now just about $99, so I was a bit under water as the shares swooned last month.

ISRG may be in a brief hiccup period while their new da Vinci S system gets rolled out and starts to get some orders and as hospitals take longer to decide which system to buy ... but I think once that possible sales lull shakes itself out we should see continuing significant advances in recurring revenue (instrument/disposable) sales as well as a ramping up of new installations.

The rollout has clearly already begun. I wrote a while back about the growth of systems and the incredible surge of hospital press releases that was beginning to make any hospital without a da Vinci look bush league, and I think that may be just beginning for the next generation da Vinci S machines.

As of the earnings announcement, there were a few da Vinci S robots in hospitals, I think the first one tested was in Atlanta, and press releases about new ones are starting to trickle out -- Dr. Savatta wrote in his great robotic surgery blog about his eagerness to use the first Da Vinci S at Newark Beth Israel when it's ready for him in April, a hospital in Illinois recently became the first to use the S system in that state, and in Oregon a hospital recently got exclusive area rights to the S system for six months, and I've seen announcements in the last month that hospitals in California, Texas and Florida have also placed orders for or installed the Da Vinci S (sorry, don't have links for those -- I think Burbank and Sarasota hospitals both have the S system on order, don't remember the Texas one) ... so anecdotally it sounds to me like the ISRG team is out selling pretty hard.

There could well be a disappointment in the next quarterly release if the results aren't as strong as in the past, even with the lower guidance, but I'd treat any short term sales blips as buying opportunities (as I treated the dip on their last earnings as a buying opportunity, though I bought a little too early at $112 and kicked myself as it dipped to the $80s).

As I've said before, I think what will drive the growth in Da Vinci systems is not only the penetration in prostatectomies -- in which they aim to hit a 25% market share in this year, from 20% last -- but the expansion into gaining significant market share in other surgeries, with mitral valve and gastric bypass looking like big areas for possible expansion, and hysterectomies and other gynecological surgeries looking like a massive market if they can achieve the same results over the coming year as they got in early urological applications.

I'll be watching their growth in these other areas, particulary in gynecological surgery, to see if they can really open up (pardon the pun) these largely untapped markets to Da Vinci utilization.

ISRG 1-yr Chart

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