Has Intuitive Surgical Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Intuitive Surgical (NASDAQ: ISRG  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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%

31.6%

Pass

 

1-year revenue growth > 12%

25.2%

Pass

Margins

Gross margin > 35%

72.4%

Pass

 

Net margin > 15%

30.6%

Pass

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

4.53

Pass

Opportunities

Return on equity > 15%

22.4%

Pass

Valuation

Normalized P/E < 20

39.79

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Intuitive Surgical last year, the company has kept its seven-point score for the second year in a row. The stock has also stayed relatively flat, posting just a 5% gain over the past year.

For the most part, Intuitive Surgical had an exceptionally strong 2012 from a financial perspective. Revenue grew 24%, with a big boost in recurring revenue pointing to the success of the da Vinci business model. That's actually been a rarity in the robotic space, as MAKO Surgical (UNKNOWN: MAKO.DL  ) and Hansen Medical (NASDAQ: HNSN  ) haven't been as lucky, with their shares dropping substantially on failures to meet sales expectations and new competitive pressures. Here, Intuitive Surgical's longer track record and better-established systems arguably give it the edge over MAKO and Hansen.

But Intuitive Surgical has found itself the subject of a short-selling attack from analyst Citron Research. Citron argues that a combination of legal liability for adverse results from surgical procedures, a perception among doctors that robotic surgery has been overhyped, and insider selling point to a big drop in share price in the future.

Moreover, Intuitive Surgical is now getting hit by a big medical device excise tax, which will cost the company 2.3% of its revenue from da Vinci sales, which Fool contributor Dan Carroll estimated at a $27.8 million hit this year. The tax could hit MAKO and Hansen even harder, though, leaving Intuitive Surgical in a strong position going forward.

For Intuitive Surgical to improve, it would need to see a big share-price adjustment to bring valuations down. Given that the company isn't likely to pay a dividend anytime soon, a score of 7 is probably about as close to perfection as Intuitive Surgical will get for the foreseeable future.

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.

Intuitive Surgical is just one of the many companies that Motley Fool co-founder David Gardner found early on that have crushed the market over the years. Now, David has opened the doors to his Supernova service, offering a personal tour for a limited time. Find out how David discovers his winners by clicking here to get instant access to Supernova today.

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


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  • Report this Comment On January 18, 2013, at 9:11 AM, pondee619 wrote:

    Shouldn't P/E, normalized or not, be compared to the company's growth rate? Aren't faster growing companies worth more (hence a higher P/E) than slower growing companies?

    "By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context." Wouldn't a better test be to see if a company's P/E reflected its growth potential?

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Related Tickers

7/31/2014 3:46 PM
ISRG $457.67 Down -9.32 -2.00%
Intuitive Surgical CAPS Rating: ****
HNSN $1.19 Down +0.00 -0.01%
Hansen Medical CAPS Rating: ****
MAKO.DL $0.00 Down +0.00 +0.00%
MAKO Surgical CAPS Rating: ****

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