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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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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Primarily US-based. Main customers are hospitals, so there can be funding concerns. Long-term, very good secular growth in robotic surgery. Tends to trade at very high multiple. When rates are high, as they have been, hospitals pause on the more costly budget items.
In the healthcare sector, but not really a defensive the way pharma is.
EPS of $1.81 beat estimates of $1.72; revenue of $2.25B beat estimates of $2.18B. EBITDA of $771M missed estimates of $864M. It was a good quarter, with revenue up 19% and earnings up 21%. The company did lower guidance a bit, but this was due to tariffs, which could be delayed, or reprieved, and should not be permanent (maybe) and should not be a big surprise. Intuitive Surgical's cut to gross-margin guidance due to tariffs may overshadow the 1Q beat and higher procedure-volume outlook. Management expects a 170-bp hit in 2025, split roughly between China and imports from other countries, particularly Mexico, with the impact expanding throughout the year. Guidance for procedure growth rose to 15-17% for the year from 13-16%, driven by strong utilization in Europe. US bariatric-procedure volume continues to face pressure from the use of GLP-1 weight-loss drugs, declining mid-single-digits in the quarter. Further pressure could come from the emergence of oral versions of the drugs. Intuitive placed 367 systems in 1Q, slightly below expectations, yet roughly in line with 4Q-1Q seasonality seen last year. Of those placed, 147 were da Vinci 5s. Very good growth overall is expected over the next two years, despite these issues. The company now has $9B cash and generating $2.4B cash annually. The long term thesis and moat here have not really changed, and any good news on tariffs would be positive for the stock, which has actually held up OK in this market considering its high valuation (up 26% in a year, down 8% YTD). The conference call did not add much in the way of detail, but other than tariffs the tone was positive. We would be OK buying this still, in the context of overall market volatility and with a 3+ year holding period.
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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.