Intuitive Surgical, Inc. (ISRG): Do Not Confuse a Great Company With a Great Invesment

Page 1 of 2

Intuitive Surgical, Inc. (NASDAQ:ISRG), appears to be amongst todays best examples of  how to separate a great company from a great investment. These two can be very different.

Intuitive Surgical is a $22 billion company in the “Medical Instruments in Suppliers” industry, and  a market leader in the field of robotics-assisted minimally invasive surgery.  This technique has advantages of lesser tissue damage, fewer complications, and shorter recovery times. First mover advantage and a large installed base of its da Vinci system provides Intuitive Surgical with a wide economic moat and barriers to entry

Intuitive Surgical, Inc. (NASDAQ:ISRG)

Allowing growth while preserving pricing power:

With initial applications in prostatectomy, new growth areas include hysterectomy as well as urological and gynecological procedures. Going forward the large installed base will generate continued instrument sales and service revenue while providing the clinical case history sought by surgeons and hospital administrators

Competition would require a substantial technology or price advantage to gain entry into this niche, which are currently not visible on the horizon.

Demonstrated strong financials:

With free cash flows being >30% of revenue and RoIC in excess of 20%. The company has a strong balance sheet with no debt and nearly $2.0 billion in cash and liquid investments – adequate to fund future growth and investment.

In comparison with the industry it may be appropriate to look at  competitors in both Medical Equipment and Supplies Industries – Baxter International Inc. (NYSE:BAX), Covidien plc (NYSE:COV), Varian Medical Systems, Inc. (NYSE:VAR) – as well as the Medical Devices industry: Medtronic, Inc. (NYSE:MDT). At the same time while GE maybe a direct competitor, review across financial metrics may not be comparable given the conglomerate nature of its business.

1). Cash flow as % of sales: Intuitive, at 30%, is 2x the ratios for all competitors

2). RoIC: Intuitive, at  20%+, is higher than large competitors in both the Medical Equipment and Supplies and Medical devices industry as well as comparable to the higher ratios of mid sized companies.

Company Ticker Free cash flow % Sales RoIC
Intuitive Surgical Inc (NASDAQ:ISRG) ISRG 30 – 35% 20%+
Baxter International BAX 12 – 15% 17 – 20%
Covidien plc (NYSE:COV) COV 15% 10 – 12%
Varian Medical Systems VAR 15% 25 – 30%
Medtronic Inc (NYSE:MDT) MDT 20 – 22% 10 – 12%
GE GE 10 – 15% < 1%

At the current price of $583, ISRG appears to be at a very high valuation on both intrinsic and relative bases.

1). Intrinsic value: Based on Morninstar analysis – Intuitive currently trades at a significant multiple of its fair value (165% vs competitors being around 80%).

2). Relative value: Similarly it trades at a forward PE of 26.5x, nearly double the multiples for competitors.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!