Increasing trade-ins sometimes hint that late adopters and laggards are purchasing Intuitive's product at an increasing rate. We naturally expect this to happen with new products over time, so more than anything it's a confirmation that their product is being accepted by the medical industry. Looking at other recent performance, Intuitive has beaten earnings estimates for 14 consecutive quarters. From 2008-2012, they reported exponential annual revenue growth of over 29%, and their SG&A expense is growing at a slightly lower rate of 27.3%. Their unique product, stellar operational performance, and more than 425% return from a 2008 investment—based near their annual lows—have investors’ full attention (Check out recent hedge fund and insider trading data for ISRG).
So, is Intuitive Surgical a buy over $550 after falling below $100 in 2008? Trading at over 32x earnings, it could be fairly valued given known uncertainties in their niche. With healthcare reform and economic headwinds still looming, it might be safer to start a small position and build it over time. Intuitive reported quarterly earnings on January 22nd and beat by almost 5.5%. Do not be surprised if their stock is trading over $650 this summer.
In case you're wondering what other stocks would help expose your portfolio to the medical equipment sector, here are a few to consider:
1) Medtronic, Inc. (NASDAQ:MDT), a well-known producer of medical equipment designed to diagnose, manage, and treat heart rhythm disorders. Pacemakers are one of their most popular products. Shares of MDT are down about 7.5% since the start of 2008, though the stock is up over 50% since hitting lows in 2011.
2) MAKO Surgical Corp. (NASDAQ:MAKO), producer of robotic surgical equipment designed to treat osteoarthritic disease, is up 14% since its 2008 IPO. The stock is down almost 75% from its 2012 highs and could present an excellent buying opportunity for investors. MAKO is one of the most similar medical equipment makers to Intuitive Surgical, due to the fact that they manufacture robotic equipment in the same industry. With 2011 revenue growth of over 57%, and 2012 1Q-3Q quarterly growth of 97%, this smaller stock will be in our sights.
3) Johnson & Johnson (NYSE:JNJ). Of course Johnson & Johnson is on this list. Sure, they're no surgical robotics manufacturer, but they offer products designed to treat some of the same diseases that Intuitive Surgical treats. In addition to offering an arsenal of over-the-counter pharmaceutical products, this company creates many devices used to diagnose and treat a wide variety of diseases. You will find several handfuls of Johnson & Johnson products in most surgery rooms and doctor's offices across the world. Shares of the company are up over 50% from their 2008 lows, and currently offer a 3.4% dividend. Investors and analysts have been pleased with their current 5-quarter streak of earnings beats as this healthcare behemoth leads the sector.
4) Baxter International, Inc. (NYSE:BAX). Up over 28% since 2008, this medical instrument stock offers a 2.7% dividend. The company creates solutions to treat hemophilia and other bleeding disorders, in addition to providing products and services related to pharmacy compounding, drug formulation, and packing. With a P/E ratio of 16.20 and an EBITD margin of around 25%, Wall Street loves this stock. Analysts’ average price target on Baxter represents a 4-5% upside from current levels, and hedge fund billionaire Ken Griffin upped his stake by over 160% in his last 13F filing with the SEC (see all of Ken Griffin’s favorite stock picks).
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Disclosure: I have no positions in any of the stocks mentioned above