Is Intuitive Surgical the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Intuitive Surgical (Nasdaq: ISRG  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Intuitive Surgical.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 46.4% pass
  1-Year Revenue Growth > 12% 40.2% pass
Margins Gross Margin > 35% 72.8% pass
  Net Margin > 15% 25.1% pass
Balance Sheet Debt to Equity < 50% 0% pass
  Current Ratio > 1.3 4.87 pass
Opportunities Return on Equity > 15% 19.9% pass
Valuation Normalized P/E < 20 30.96 fail
Dividends Current Yield > 2% 0% fail
  5-Year Dividend Growth > 10% 0% fail
       
  Total Score   7 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With seven points out of 10, Intuitive Surgical comes through with a high score. Once the company matures a bit and starts making payouts to shareholders, Intuitive could easy pop up to perfect-stock status.

Those who've followed the robotic surgical systems maker shouldn't be surprised at its performance, though. As first mover in a promising area with nearly limitless growth potential, Intuitive Surgical still has no serious competition. Accuray (Nasdaq: ARAY  ) has its CyberKnife non-invasive surgical tool for cancer treatment, but it has only a fifth of the annual revenue of Intuitive Surgical. And MAKO Surgical (Nasdaq: MAKO  ) , which is applying robotics to knee replacement, is even further behind on the growth curve.

Unfortunately, the whole medical-device industry has gone through some tough times during the recession. In its most recent quarter, Intuitive Surgical reported slower growth in procedure counts and lower sales of new systems. That jibes with what Medtronic (NYSE: MDT  ) and Johnson & Johnson (NYSE: JNJ  ) have seen recently as well. But given that most people can't put off medical procedures forever, it's likely that Intuitive Surgical and its peers will see demand growth return to its upward curve soon enough. In time, that could put the stock in line for future perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Intuitive Surgical to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Intuitive Surgical and MAKO Surgical are Motley Fool Rule Breakers picks. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor selection. The Fool owns shares of Johnson & Johnson, and Medtronic. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On December 18, 2010, at 8:28 AM, Maksani wrote:

    Until hospitals suddenly find a few million in cash laying around this company wont be making sales. I spoke with a surgeon last week, he works on brain and spinal column, who is hard pressed to understand the advantage of that expense in equipment. It might help an old surgeon who no longer has steady hands, so does the DaVinci machine help lower liability to the hospital? There are cheaper ways to do that. Once the (very small) market is saturated, whats left are service fees and any disposables. At first I thought this device allows remote distance operations but my friend said a specialist really needs to be in the room in case anything unforeseen comes up.

    ~Mak

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