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Intuitive Surgical may be a battleground stock, but it has the fundamentals to win the war, says Tao Levy, Managing Director at Wedbush Securities.
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It seems that every year the question is worded in a slightly different context, but the underlying theme is always same: What is going to happen on Wall Street if — and here you can substitute the event de jour. 

Unfortunately, all the crystal balls in the world are not going to help your portfolio. Instead you should consider researching quality investment opportunities such as Intuitive Surgical (ISRG).

Intuitive manufacturers surgical robots known as the da Vinci systems that make the work of trained surgeons easier by increasing visibility and allowing for finer control of the surgical instruments. They also allow surgeries to be done with smaller incisions thereby reducing bleeding and recovery times.

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When I last wrote about the company a year ago, my estimated earnings target was 21.50 per share, with a 12-month target price on the shares of $750 for a capital gain of nearly 9 percent. So how did the company do? Earnings came in at $22.36, and the shares recently closed at $1,016.77.

Before you gasp at the price of the stock, please note that the company’s board of directors has approved a 3-for-1 stock split and that post-split trading will commence Friday, Oct. 6.

For its second quarter, Intuitive Surgical posted revenues 756.2 million — a gain of 12.8 percent year-over-year. For the quarter, net income was about $228 million, representing growth of about 3.6 percent YoY. Adjusted earnings per share came in at $5.95, as compared to $5.62 in the same period a year ago.

Procedure volume in the second quarter rose approximately 16 percent, resulting in an expansion of the company’s recurring revenue stream. Revenues from instruments and accessories rose approximately 17 percent during the quarter, while systems revenue were up about 7 percent.

In the second quarter, 166 da Vinci surgical systems were shipped, as compared to 130 in the same period a year ago — a 27.8 percent increase. The company also launched a lower-priced da Vinci X system.

Growth in the quarter was primarily driven by the recurring revenues generated from selling instruments, accessories and services; although there was a degree of higher system revenues.

Intuitive Surgical’s business plan is focused on accelerating its strategic investments and expanding across low-cost and untapped markets, thereby strengthening its position amid impending competition.

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Sequentially, operating expenses in the second quarter rose about 2 percent and were related to planned product development investments. The investments will likely provide returns in the medium to long term.

The shares traded at their 52-week high of $1,003 on Aug. 31 of this year. For those who like a little bit of technical analysis, the shares have a 50-day moving average of about $1,001 and a 200-day moving average of about $900.

Intuitive Surgical expects its capital investment to moderate during the second half of 2017. However its fiscal 2017 operating expenses are expected to increase about 17 to 18 percent. 

The company expects to spend about $80 million for the deployment of da Vinci X and da Vinci Sp surgical systems, flexible catheter-based system deployment, enhanced imaging and intelligent systems and global infrastructure development.

The investments also include any clinical and economic investments. In the second quarter, the company invested in a clinical trial. The trial was carried out at investigational device exemption sites for transoral robotic surgery.

Although Intuitive Surgical leads the surgical robotics market, there are competitive threats from other major players in the market. These companies include TransEnterix, Medtronic, and Verb Surgical, which is a joint venture of Johnson and Johnson and Alphabet.

The intrinsic value of the shares, using a free cash flow to the firm model is $1,115 per share. My estimated earnings target for fiscal 2018 is $28.00 per share pre-split, with a 12-month target price on the shares of $1,100 pre-split, for a capital gain of about 8 percent.

Lauren Rudd is a financial writer and columnist. You may write to him at Lauren.Rudd@RuddInternational.com. 

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