Recently, Intuitive Surgical, Inc. (NASDAQ:ISRG) experienced a significant decline of more than 11.3% in after-hours trading, from $500 per share to only $443.50 per share. The dramatic fall was due to its disappointing outlook for its second quarter results. Should investors consider this recent significant drop a buying opportunity? Let’s take a closer look and find out.
Fast and consistent operating performance growth
Intuitive Surgical, Inc. (NASDAQ:ISRG) is the manufacturer and designer of da Vinci Surgical Systems, which provides surgeons with intuitive control, range of motion, fine tissue manipulation capability and 3-D vision. Most of its revenue, $1.84 billion, or 84% of the total revenue, was generated from product sales, while the service revenue came in at only $342.6 million in 2012. The company reported that the recurring revenue was nearly $1.25 billion, accounting for 57% of the company’s total sales.
In the past five years, the company has managed to consistently grow its revenue and net income. Revenue increased from $875 million in 2008 to nearly $2.18 billion in 2012, while the net income rose from $204 million, or $5.12 per share, to $657 million, or $15.98 per share, during the same period. The company also had quite conservative capital structure. As of March 2013, it had $3.77 billion in equity, $1.36 billion in cash and short-term investments, $1.76 billion in other equity investments, and no debt.
The company expected that its second quarter revenue might experience a 7% growth, from $537 million last year to $575 million this year. while net income rose slightly from $155 million in the second quarter of 2012 to $160 million in the second quarter this year. Those operating results fell short of analysts’ expectations of $178 million in earnings and $630 million in revenue. Gary Guthart, the company’s CEO. said
While we are disappointed in our performance this quarter, particularly with respect to our capital sales in the U.S., overall procedure performance was solid in a difficult environment.
Highest EBITDA multiple among its peers
At $443.50 per share, Intuitive Surgical is worth $17.8 billion on the market. The market still seems to value the company quite expensively, at 16.8 times its trailing EBITDA, and around 1.53 times its PEG. Compared to its peers Accuray Incorporated (NASDAQ:ARAY) and Medtronic, Inc. (NYSE:MDT), Intuitive Surgical, Inc. (NASDAQ:ISRG) has the highest EBITDA multiple among the three.
Accuray is trading at $5.70 per share, with a total market cap of nearly $422.50 million. Because of its negative EBITDA and earnings, the EBITDA multiple and PEG ratio are not valid. Its price-to-book ratio is quite high, at 3.45. Accuray is the provider of a full range of radiation therapy and radiosurgery treatments, with several manufacturing sites in the U.S. and China. Accuray has been trying to expand its market with two main new products: TomoTherapy H series, covering the full spectrum of radiation therapy treatments, and CyberKnife M6 Series, the premier solution for full-body radiosurgery. Moreover, it has also had ongoing business restructuring to keep growing revenue and gross profit and reduce its operating expenses, so that the business could turn profitable. For the full year 2014, the company expects to deliver a gross profit of $13-$15 million per quarter in 2014, and reduce its non-GAAP operating expenses to around $38 million per quarter by the last quarter of fiscal 2014.