How Expensive (or Cheap) Is Intuitive Surgical's Stock by the Numbers?

Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples
  • The consistency of past earnings and cash flow
  • How much growth we can expect

Let's see what those numbers can tell us about how expensive or cheap Intuitive Surgical (Nasdaq: ISRG  ) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Intuitive Surgical has a P/E ratio of 42.7 and an EV/FCF ratio of 33.8 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Intuitive Surgical has a P/E ratio of 72.5 and a five-year EV/FCF ratio of 57.9.

A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.

Intuitive Surgical is zero for four on hitting the ideal targets, but let's see how it compares against some competitors and industry-mates. (I would have included MAKO Surgical, but it doesn't have five years of true operating history under its belt.) 


1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Intuitive Surgical 42.7 33.8 72.5 57.9
Medtronic 11.8 12.4 14.5 13.4
Stryker 15.4 14.7 17.6 16.0
C.R. Bard 25.0 13.1 19.3 15.6

Source: S&P Capital IQ.

Numerically, we've seen how Intuitive Surgical's valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Intuitive Surgical's net income margin has ranged from 22.1% to 28.2%. In that same time frame, unlevered free cash flow margin has ranged from 19.7% to 33.8%.

How do those figures compare with those of the company's peers? See for yourself:

Source: S&P Capital IQ; margin ranges are combined.

Additionally, over the last five years, Intuitive Surgical has tallied up five years of positive earnings and five years of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Intuitive Surgical has put up past EPS growth rates of 45.5%. Meanwhile, Wall Street's analysts expect future growth rates of 21.1%.

Here's how Intuitive Surgical compares to its peers for trailing five-year growth:

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples shares of Intuitive Surgical are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 42.7 P/E ratio, and we see tremendous profitability and tremendous growth for its hefty price multiples. The decision on whether to buy is more difficult, but I personally continue to hold my shares despite the high price multiples because I believe in the potential of robotic surgery (backed up by its already-strong performance history).

As another data point, our CAPS community rates Intuitive Surgical four stars (out of five). But all this is just a start. If you find Intuitive Surgical's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.

I wrote about a stock that's flying under the radar in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the company I believe Warren Buffett would be interested in if he could still invest in small companies.

Anand Chokkavelu owns shares of Intuitive Surgical, but he holds no other position in any company mentioned. The Motley Fool owns shares of Medtronic and MAKO Surgical. Motley Fool newsletter services have recommended buying shares of Stryker, MAKO Surgical, and Intuitive Surgical. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 27, 2012, at 5:55 PM, EquityBull wrote:

    A study yesterday by some leading medical journals showed how gastric bypass and lap band surgery is hugely beneficial for diabetes (in terms of overweight diabetics).

    This has potential to lead to performing these surgeries vs medication as bariatric surgery had better outcome. If so this is a huge area for procedure growth in the next decade as patients opt for low pain and lower risk robotic surgery to get in and out fast. They lose weight and diabetes improves or disappears. I expect this to potentially be a growing segment in the near future (among other expanding indications)

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