Does Intuitive Surgical's 2012 Justify the Sell-Off?

Shareholders of ballyhooed surgical robotics company Intuitive Surgical (ISRG -0.55%) have had an up-and-down year, to say the least. The surging stock dipped and gained throughout 2012, picking up enough momentum by the end of November to make double-digit gains seem possible. But a bearish report by noted short-selling site Citron Research was enough to send Intuitive investors into a panic -- and the stock into a freefall. With shares now up just 1.6% year-to-date, should investors be concerned about Intuitive's future -- or was 2012 good enough to put your faith in this growing medical giant?

A financially sound 2012
On a purely financial standpoint, investors should love Intuitive's 2012. Through the first nine months of the year, the company's posted revenue growth of 24% -- roughly equal to last year's growth and on pace to post impressive results for the full year. Recurring revenue in particular has shown impressive growth of more than 27%, exceeding $900 million through the first nine months of the year.

Domestic revenue has really taken off this year. Sales in the U.S. have picked up more than 26%, eclipsing the $1 billion mark easily through the first nine months of the year. With international markets in flux -- particularly Europe, locked in the grips of a devastating financial crisis -- Intuitive has doubled down on the home front to the delight of investors.

Profit has ended up growing even more. For the first nine months of 2012, net profit has grown by an astronomical 40%, boosted by reduced tax and operating expenses. Intuitive's net margin has soared from 27% through the first nine months of 2011 to 31% during the same time frame this year.

All roads lead to da Vinci
It's all about the da Vinci surgical robotic unit for Intuitive, and the company's faced its share of hurdles this year. Besides the Europe situation, the U.S. Preventive Service Task Force recommended against prostate-specific antigen, or PSA, cancer screening, a move that -- combined with trends away from surgery for low-risk patients -- Intuitive estimates hurt its da Vinci prostatectomy business by as much as 20% in the third quarter.

There have been good trends for the da Vinci in 2012, too, however. The Food and Drug Administration's approval of Intuitive's Single-Site incision instruments -- designed to operate through  less invasive measures -- have led to the sale of these to more than 350 customers through the year's first nine months. As the FDA only approved the instruments for a single indication, further approvals could send sales much higher.

Sales of the da Vinci itself have done quite well this year. Intuitive's recorded more than 16% growth in sales of the units, with domestic sales picking up nearly 20%. The company now has more than 2,400 systems installed in more than 1,900 hospitals around the globe -- more than enough of a foundation to expand its sales of systems and grow recurring revenue in the years to come.

Gains and losses across the industry
That's not to say it's been all good for Intuitive investors. Rising health care costs haven't stricken this stock yet, but with hospital budgets tightening, it's only a matter of time before medical professionals begin questioning whether a million-dollar machine is worth the money.

Europe, naturally, also hit Intuitive hard this year. The ongoing financial crisis across the Atlantic has battered the entire medical community -- Intuitive's international revenues have seen slower growth as a result, gaining just 18% over the first nine months of the year. International revenues now make up 2% less of the company's total than they did last year, declining from 22% to 20% of total sales.

While the international situation hasn't been good, Europe's plagued virtually every stock in the health care sector. Traditional medical companies Stryker (SYK 0.58%) and Boston Scientific (BSX 5.68%) both experienced organic growth declines outside of the U.S. in multiple quarters this year, with Europe's widespread fiscal tightening and currency issues exacerbating the problem across the industry.

Even among the robotic surgery field, Intuitive has looked outstanding. MAKO Surgical (MAKO.DL) and its stock have had an awful 2012, with full-year sales guidance of RIO surgical systems lowered in July and shares falling an abysmal 57% year-to-date -- a fate that hasn't been helped by burgeoning competition in its industry. Less-talked-about Hansen Medical (HNSN) has also seen shares fall drastically, with the stock losing 21% year-to-date.

Maybe a bearish research report isn't so bad, after all – not when Intuitive's managed to beat its industry and continue its strong sales in 2012.

As solid as they come
Despite December's dip, Intuitive has had a year for investors to cheer. It may not show up on the stock chart, but the combination of solid financial growth, success in domestic sales, and topping a downbeat industry in 2012 have pushed Intuitive to the top of the surgical robotics industry. The recent sell-off doesn't point toward a radical destabilization of the business -- it indicates a great time to buy this solid stock on a dip. While the health care industry faces its own challenges in 2013, Intuitive's positioned itself well in 2012 to continue its momentum for many years to come.