Opinions
The Monthly Gems by Allan Tong
Intuitive Surgical Inc.
ISRG-Q
TOP PICK
Jan 02, 2025
Stock price when the opinion was issued
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Last week, it reported a great quarter, its shares reversing a sell off earlier this month. Revenues are 14% YOY, non-GAAP EPS 25% YOY and beat revenues. They raised their guidance and cut their operating expenses outlook. Surgeries have been increasing along with use of ISRG's surgical equipment, such as up 22% outside the US and 14% in the US. Caveat: it trades at 70x PE, but it's always been high, in early 2021 at 85x forward and averages 58x PE. They've beaten the last 6 quarters. He believes in it. Buy on pullback, typically in August -September.
The GLP-1 weight loss companies are really in the sweet spot. For example for LLY, a very large holding for him, the opportunity for them is a very large marketplace. Getting approval for a broader range of uses.
He also owns ISRG, which will help with the cost of healthcare, a very big growth opportunity. He owns MCK too.
Those 3 names together make up a 5% weight for him, which is underweight the market.
Considering it is nearly a global monopoly, we would be comfortable at 5%.
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EPS of $1.84 beat estimates of $1.64; revenue of $2.04B beat estimates of $2.00B. Intuitive Surgical's 3Q earnings show strong momentum in the adoption of its latest surgical robotic technology and margin expansion, with further potential upside as utilization expands. The quarter's 18% procedure growth beat estimates for 17.1%, with gains in the installed base and system utilization easily compensating for bariatric procedure declines. The 379 da Vinci placements in 3Q, including 110 of the new Da Vinci 5 robots, surpassed estimates. This trend makes Intuitive's procedural volume growth guidance of 16-17% look conservative as it only raised the low end of the range. Operating margin of 37% exceeded analyst estimates of 34.8%, with management citing operating leverage as it updated its 2024 operating expense growth outlook to 10-12% year-over-year, from 10-13% previously. Things continue to look very good here.
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It is one of our favourite growth companies and we will have a hard time specifically being negative here. Of course, in a TFSA one cannot utilize losses, so that's an added risk to an 'expensive' stock. There are some small competitrors, and new US policies towards cutting healthcare costs could impact sentiment towards the stock. The stock can decline. It went down 21% in 2022, 16% in 2013, 20% in 2010, 52% in 2008, 18% in 2006 and 39% in 2002. Most of these declines were economically-related. Of course, over that same period the stock rose more than 26,000%, with triple-digit gains in 2004 and 2005.
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Is up 55% over the year, though -4% today after earnings and 12% so far this year. They pre-announced strong topline numbers of 25% revenue growth as global Da Vinci procedures grew 18%--and they sell consumables for the Da Vinci system, so more revenues to come. They guided 13-16% DV growth this year--strong numbers. And yet they disappointed investors last night, because of the full-year forecast of 67-68% gross margin, down from last year's 69.1% and below estimates. Also, they signaled rising costs over last year, which the reaction is overblown and misguided. After all, demand for the system is durable and every US company is facing headwinds from the strong USD and potential impact from new Trump tariffs (Mexico makes some of their products). Also, their higher expenses are building the company, which is good.
We would look at P/E (61X, vs 3-year 72X), P/CF (72 vs 70X) and earnings growth (18% vs 30%). Overall growth rates have slowed as the company gets bigger, but free cash flow has surged anf the company has $4B net cash. The stock is down 6% YTD. We think $475 would look good.
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After a flat first half to 2024, back-to-back earnings beats in July and October lifted ISRG shares from the low-$400s to the mid-$500s by the fall. The last two quarterly reports stressed that an increasing number of surgeries within the U.S. and internationally is the key driver. For instance, the company's October reported said that procedures rose 18%, beating estimates of 17.1%. The quarter before, this number climbed 14% in the U.S. and 22% abroad.