Buy, Sell, or Hold: MAKO Surgical

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at MAKO Surgical (UNKNOWN: MAKO.DL  ) today, and see why you might want to buy, sell, or hold it.

Founded in 2004, based in Florida, and with a recent market capitalization of $480 million, MAKO is in the business of making medical devices -- specifically, RIO Surgical robotic equipment and orthopedic implants. Its main offerings involve partial-knee arthroplasties and total hip replacements.

Buy
MAKO's business arena is one big draw, thanks in part to our world's growing and aging population. (Our obesity problem helps as well, as obesity can accelerate knee and hip degeneration.) According to my colleague Brenton Flynn, knee and hip procedures have been growing faster than the overall population, which bodes well.

The company's revenue has been growing steadily, but its net income has remained negative. On the plus side, though, the losses have represented a shrinking portion of revenue. And while recently reported fourth-quarter earnings disappointed many investors, they were in line with company projections and do reflect continued growth and market acceptance. In 2012, the number of RIO procedures completed rose 29% over year-earlier levels.

Another plus is quality, as the RIO systems offer below-average failure rates.

Sell
One strike against the company is that its current offerings remain a bit limited in scope, addressing just partial knee replacements, for example, and not total replacements. The company's performance in 2012 is also not auspicious, as it underperformed sales expectations and saw its stock plunge some 49%. (The stock soared more than 60% in 2009 and 2011, and more than 30% in 2010. These numbers also point to another drawback for some: volatility. If you can't handle wide swings, steer clear.)

The stock's valuation doesn't reflect a screaming buy. Due to negative earnings, there's no P/E ratio, and the recent price-to-sales ratio of 4.5 -- while below the company's five-year average of 15.3 -- is well above the S&P 500's 1.4 and the industry's 2.1.

Dilution is another concern, as MAKO's share count has been inching up. That's not necessarily a dealbreaker, as funds generated from share issuances can help further growth. But adding shares does reduce the stake in the company claimed by the earlier shares.

MAKO has powerful competition, too, or potential competition, such as from Intuitive Surgical (NASDAQ: ISRG  ) , which has a market value nearly 50 times greater than MAKO and has been posting strong double-digit growth in both revenue and earnings in recent years, with more and more hospitals buying its million-dollar daVinci machines. Right now, Intuitive's business and MAKO's don't really cross paths.

An even bigger competitor, which is involved some of the same work as MAKO, is Johnson & Johnson (NYSE: JNJ  ) , which has a unit focused on orthopedic devices that generates more than $6 billion in revenue annually -- in addition to other medical device businesses. Stryker and Zimmer Holdings (NYSE: ZMH  ) are also working in orthopedic devices. Zimmer recently received the FDA's blessing for a new guidance system for knee replacement procedures. Meanwhile, there's a new competitor on the block -- Blue Belt Technologies, with an FDA-approved orthopedic robotic surgical system.

Finally, there's the new 2.3% tax on medical devices that companies such as MAKO will be required to pay. And as my colleague Dan Carroll has pointed out, it will hit unprofitable companies such as MAKO hard, as they won't be able to pay it out of earnings.

Hold (off)
Given the reasons to buy or sell MAKO Surgical, it's not unreasonable to decide to just hold off on it. You might want to wait for it to be offering machines that perform a wider range of procedures, or for its net losses to turn into net gains, ideally for a string of quarters.

You might also check out some other interesting related companies, to see if they seem like better bargains than MAKO. Perhaps take a look at Accuray (NASDAQ: ARAY  ) , which specializes in radiosurgery and radiotherapy. Its stock is down some 42% over the past year, leading some to see it as bargain-priced now, with a recent price-to-sales ratio below 1. But it recently projected declining revenue due to manufacturing and supply issues. It's worth learning more before jumping in.

The verdict
I'm actually a shareholder in MAKO already, though I'm underwater on it. It does seem potentially promising to me, but it's far from low-risk. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

Zero to hero?
To offer a more detailed look at MAKO, Fool.com analyst and MAKO expert David Meier has authored a premium research report covering all of the must-know details on the company, including key areas to watch and risks looming in the future for the medical robotics company. Claim your copy, and a year of free analyst updates, by clicking here now.



Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

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 February 14, 2013, at 1:41 PM, Dawgpac wrote:

    You forgot hips and the fact that they already diluted in December. No debt. Meet/beat last two quarters with 30 RIOs sold, per Q3 results and Q4 pre-announce. Not bad after missing first two quarters in 2012. Utilization creeping back up. Hips are huge and the partial knee market is one that is rapidly expanding. Hiring the ISRG institutional sales director was key in expanding the sales to Adventist, UHS, HMA, Tenet. Starting to come together nicely.

  • Report this Comment On February 15, 2013, at 8:24 AM, philipcarl31 wrote:

    to the dummy author of this article: INTUITIVE SURGICAL IS *NOT* A COMPETITOR TO MAKO!

  • Report this Comment On February 16, 2013, at 8:19 AM, TMFSelena wrote:

    philipcarl31 --

    Thanks for your kind note. You're right, that it's not a competitor now -- though it might become one. It's in the same field, though. And I did note that, "Right now, Intuitive's business and MAKO's don't really cross paths."

    Selena

  • Report this Comment On February 19, 2013, at 12:01 PM, verdure wrote:

    Good reply Selena, I assumed that you meant they were competing for sales from the same industry and the same restricted budgets.

  • Report this Comment On February 20, 2013, at 1:54 PM, troy2011 wrote:

    badrobotsurgery.com reports injuries from the Davici robot. will that affect ISRG's price? might that help MAKO? just wondering.

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