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Does Intuitive Surgical Still Make the Cut?

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Even the best performers need to be reevaluated from time to time. Robotic surgical systems maker Intuitive Surgical (Nasdaq: ISRG  ) surely falls into the best performer category. The stock soared more than 3,300% in the last 10 years and is up over 20% in the last 12 months.

However, shares fell more than 8% recently after the company reported slower sales, and they have since declined an additional 5%. Does Intuitive Surgical still make the cut for investors' portfolios? Let's use the tried-and-true SWOT analysis approach to find out.

We won't encounter any problems finding strengths for Intuitive Surgical.

Revenues were up 26% in the most recent quarter compared to last year. Earnings grew by over 32% during the same period. The company has no debt and generates solid cash flow.

Recurring revenue makes up 56% of total revenue and is growing as the company expands its install base. Customers pay for replacement instruments and accessories plus ongoing system service. It's the classic razor/razor blade business model.

These financial strengths stem from growing interest in Intuitive Surgical's da Vinci robotic surgical systems and accessories. The company cites recent studies that attribute successful patient outcomes to use of da Vinci, including open hysterectomies with less blood loss, lower rates of post-operative complications, and much lower readmission rates for patients having prostatectomies. These kinds of results should translate to continued sales growth for the company.

Probably the most visible weakness for Intuitive Surgical right now is Europe. The economic situation there has created challenges for the company. Intuitive Surgical also seems to have had some management issues with its European operations, resulting in a recent top-level shakeup.

From an investor's viewpoint, the stock's valuation could be considered a weakness. Its trailing price-to-earnings (P/E) multiple is around 34. The P/E to growth (PEG) ratio is 1.6, while lower than before, is still at a level where some growth investors perceive a stock as too pricey. The high share price -- currently around $475 -- also prevents some smaller investors from buying the stock.

A major opportunity for Intuitive Surgical lies in expanding internationally. The company is growing its international sales, with 2011 international revenue up nearly 32% from the prior year. However, the U.S. still accounts for 78% of total sales, reflecting plenty of global growth potential.

Intuitive Surgical estimates that da Vinci systems have been used to perform nearly 100 types of surgical procedures. However, not all of these uses for da Vinci are widely adopted at this point. The possibility of expanding the number of procedures for which surgeons can use the system presents a great opportunity for the company.

Telesurgery also looks to be a big potential new market for Intuitive Surgical. A shortage of surgeons exists across the world. Some surgical specialties in the U.S. are projected to be especially affected by an increasing shortage, with OB/GYN at the top of the list. Intuitive Surgical states that "the da Vinci system could theoretically be used to operate over long distances." The company is exploring telesurgical applications for the system.

Intuitive Surgical sees its biggest current competitive threat to be conventional surgeries and non-surgical treatments. MAKO Surgical (Nasdaq: MAKO  ) offers a robotic system for orthopedic surgeries. However, MAKO doesn't directly compete with Intuitive Surgical.

There is an emerging threat, though. SOFAR, an Italian medical device company, has developed a telesurgical robot system with support from the European Commission's Joint Research Centre.

The industry also seems ripe for one of the large health-care players with deep pockets to step in. General Electric (NYSE: GE  ) , for example, has a significant medical device business and the cash to invest in the robotic surgical system market if they chose to do so. Siemens (NYSE: SI  ) is another conglomerate that is a major contender in the medical device market. Like GE, Siemens is sitting on billions in cash and equivalents.

So what?
Overall, I think there is a compelling case for buying Intuitive Surgical. Its strengths and opportunities outweigh the weaknesses and threats, in my view. I suspect that the company can grow faster than many expect over the next few years.

The recent sell-off could present an attractive buying opportunity for growth investors. The company strongly hinted that the third quarter would be weaker primarily because of timing of expenses. However, it increased full-year revenue guidance while maintaining guidance on 2012 expenses. The heavy selling in reaction to the near-term news seems to have overlooked the long-term positives for the stock.

After performing incredibly for 10 years, does Intuitive Surgical still make the cut for investors? My intuition says yes.

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Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of Medtronic and St. Jude Medical. The Motley Fool has a disclosure policy. The Motley Fool owns shares of MAKO Surgical and Intuitive Surgical. Motley Fool newsletter services have recommended buying shares of 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.

Read/Post Comments (3) | Recommend This Article (6)

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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 July 25, 2012, at 6:22 PM, EquityBull wrote:

    Good article. You might also note that ISRG could be a takeout candidate for one of those large co's you mentioned with lots of cash to spend. Getting ISRG's existing product line, service revenue and patent portfolio would be a crown jewel for any medical device maker

  • Report this Comment On July 25, 2012, at 6:53 PM, TheDumbMoney2 wrote:

    I agree.

  • Report this Comment On July 26, 2012, at 11:33 AM, TMFFishBiz wrote:

    EquityBull, you make a very good point. ISRG could be a great acquisition candidate for some of the bigger health technology companies. The robotic surgery market is destined to grow IMHO, especially the telesurgery applications. The bigger players are paying attention without a doubt.

    Thanks for reading and for your comments!

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