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Intuitive Surgical, Inc. (ISRG): Is a Huge Share Buyback The Cure For This Healthcare Stock?

Beleaguered healthcare stock Intuitive Surgical, Inc. (NASDAQ:ISRG) recently announced a new, massive share repurchase authorization. The buyback couldn’t come at a better time. The stock is reeling after a hugely disappointing quarterly report and widespread fears about the safety of its revolutionary da Vinci surgical robots.

Should investors take this news seriously? Or is management simply trying to buy itself time until it can sort out its underlying problems?

A positive catalyst, or meek attempt to stop the bleeding?

At first glance, a healthcare company that authorizes a share buyback program in the middle of a flurry of negative press regarding the safety of its surgical procedures may seem like a transparent attempt to prop up its share price.

On the other hand, it could entirely represent a shrewd capital allocation move by management. Intuitive Surgical, Inc. (NASDAQ:ISRG)’s stock price has gotten hammered over the past few months and, at under $400 per share, is at a level not seen in years.

The company’s issues have been well-publicized. Investors were clearly disappointed by the company’s fiscal second quarter results, which showed that revenues clocked in at $578 million. Unfortunately, earnings per share missed analyst expectations, coming in at $3.90 per share.

All told, both revenue and earnings per share represented year over year growth, albeit single digit growth. The quarter’s results broke a four-year streak of double digit growth.

Sadly, many companies are simply terrible at timing their buybacks. If you believe in the widely-followed ‘buy low, sell high’ investing adage, then you’ll have a hard time figuring out why so many companies buy back their own stock at what seems like exactly the wrong time.

Intuitive Surgical (NASDAQ:ISRG)Share buybacks were all the rage during the market rally of 2006 and 2007.  Buybacks then dried up during the market meltdown of 2008, as management teams held on to cash with an iron-clad grip. Then, as is so predictable, companies only felt better about buying back their own shares after stocks had doubled off their 2009 lows.

In that sense, we should give Intuitive Surgical, Inc. (NASDAQ:ISRG) credit where it is due: the company feels its stock is underpriced, is optimistic about its future, and is demonstrating a real commitment to shareholders by buying back stock at low prices.

And, it’s not as if this is a token authorization. Intuitive Surgical, Inc. (NASDAQ:ISRG) already had $721 million remaining in its existing share repurchase plan, then proceeded to double it to $1.5 billion. That represents about 10% of the company’s entire market capitalization.

Should you avoid Intuitive Surgical altogether?

For investors who’d rather not stick by Intuitive Surgical, Inc. (NASDAQ:ISRG) while the company gets its act together, there are alternatives in the space that could be interesting.

MAKO Surgical Corp. (NASDAQ:MAKO) is an intriguing choice because of its strong revenue growth in recent periods. However, MAKO has had its own share of problems in recent quarters. The company is struggling to maintain profitability, despite its strong revenue growth.

To illustrate, MAKO Surgical Corp. (NASDAQ:MAKO) reported 26% first-quarter revenue growth. However, MAKO was unable to turn a profit, losing nearly $10 million during the quarter, or $0.21 per share. This was worse than analyst expectations, which called for a net loss of $0.19 per share.

Alternatively, investors could consider healthcare behemoth Johnson & Johnson (NYSE:JNJ). The company behind Listerine mouthwash and Band-Aids also has a significant medical devices segment. J&J can offer investors exposure to the lucrative surgical device market with the added safety of strong consumer brands.

J&J has a market capitalization in excess of $260 billion. Moreover, Johnson & Johnson (NYSE:JNJ) is the gold standard among dividend payers. Whereas Intuitive Surgical, Inc. (NASDAQ:ISRG) does not pay a dividend to shareholders, J&J has a dividend track record that is tough to beat. J&J recently raised its dividend for the 51st consecutive year, and the company’s current yield stands near a healthy 3%.

The Foolish conclusion

I believe Intuitive Surgical, Inc. (NASDAQ:ISRG)’s buyback is a genuine effort at providing shareholders a meaningful dose of downside protection. Shareholders have taken it on the chin in recent months, and the company’s massive buyback authorization should help boost earnings per share, and consequently, put a floor under the stock price.

What does still concern me is the over-hanging doubt as to the safety of the da Vinci robot. While reports of deaths and complications due to the surgical robots are no small matter, I continue to believe the da Vinci robot represents a truly revolutionary technology.

As Warren Buffett said, investors should be greedy when others are fearful. The market is clearly fearful about the fate of Intuitive Surgical, Inc. (NASDAQ:ISRG), but at a price under $400 per share and the backing of a $1.5 billion buyback, the stock is likely much closer to its bottom than to its top.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical, Johnson & Johnson, and MAKO Surgical. The Motley Fool owns shares of Intuitive Surgical and Johnson & Johnson.

The article Is a Huge Share Buyback The Cure For This Healthcare Stock? originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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