As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
We can't know for sure whether Buffett is about to buy Intuitive Surgical
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Intuitive Surgicalmeet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Intuitive Surgical's earnings and free cash flow history.
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over the past five years, Intuitive Surgical has grown its earnings pretty significantly.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison among peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company |
Debt-to-Equity |
Return on Equity (LTM) |
Return on Equity (5-Year Average) |
|---|---|---|---|
| Intuitive Surgical |
0% |
20% |
18% |
|
Medtronic |
62% |
20% |
21% |
|
St. Jude |
58% |
22% |
19% |
|
Boston Scientific |
43% |
5% |
(14%) |
Source: Capital IQ, a division of Standard & Poor's.
Intuitive Surgical produces a fairly high return on equity while employing no debt.
3. Management
CEO Gary Guthart has been at the job since only 2010, though he'd been a president of the company for a few years prior.
4. Business
Although the company's surgical systems are fairly high-tech, the patent moat is considerable.
The Foolish conclusion
Regardless of whether Buffett would ever buy Intuitive Surgical, we've learned that, although he may be slightly uncomfortable with the industry and prefer a bit longer-tenured management, the company exhibits some of the other characteristics of a quintessential Buffett investment: growing earnings and high returns on equity with limited debt.
To stay up to speed on the top news and analysis on Intuitive Surgical or any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
