How Earnings Point to MAKO Surgical's Evolving Story

Medical robotics maker MAKO Surgical (UNKNOWN: MAKO.DL  ) has emerged as one of the most exciting stories in the future of medicine -- but its stock has become a gut-churning roller coaster ride for investors, who would happily settle for some stability. MAKO's shares have lost more than 71% over the past year, and Wall Street is nervously awaiting this growth stock to finally start living up to its billing.

The company reported earnings Tuesday, and while shares jumped more than 3% in after-hours trading, investors are mixed on the results. Here's what you need to know -- and what MAKO's latest message indicates about this stock going forward.

Just the facts
Let's first review the basics of MAKO's most recent quarter to get an understanding of where this company's at.

MAKO missed out on analyst projections for the fourth quarter, posting earnings-per-share losses of $0.13. Estimates had pegged the losses at $0.11 per share, but while MAKO couldn't meet the analyst numbers, it did beat last year's $0.14 per-share fourth-quarter losses. Revenue fell 8% year-over-year, however, settling in at $30.2 million for the fourth quarter.

Full-year revenue looks a little better. Sales of 45 RIO units -- right in line with MAKO's earlier guidance -- helped power the company's $102.7 million in revenue for the year, up 21.5% year-over-year. The company also lost around 10% less overall in 2012 than in 2011, a positive sign in MAKO's quest for profitability.

While those numbers shocked few people -- MAKO hinted at earnings back in January, when it announced its 45 RIO sales for 2012 -- the company's guidance projected sales of only 45 to 48 RIO units in 2013. While that won't impress anyone, MAKO's flat guidance won't disappoint investors, either, as the company's lowering of projected full-year RIO sales in the middle of 2012 did. In this case, modesty is a virtue.

Trends you need to know
While RIO sales projections may be uninspiring, the company's quite optimistic about procedural growth -- a key cog for the success of this company's future.

MAKO projects RIO customers to perform between 13,500 and 14,000 procedures in 2013. That's year-over-year growth of between 32% and 37% over this past year's 10,204 procedures, and shows procedures accelerating after the company recorded 29% growth of completed RIO procedures in 2012. More procedures will involve physicians becoming more comfortable with the RIO machine, something that should fuel future sales and take advantage of favorable orthopedics trends in obesity and aging.

Sales of hip applications are on the rise as well, which should help those procedural projections. The company sold 11 MAKOplasty hip applications in the fourth quarter; as of the end of 2012, 62% worldwide commercially installed RIO systems had the applications. That's a considerable step up from the end of 2011, when only 44% of commercially installed bases had them. MAKOplasty procedures are soaring on the back of these gains, growing by 47% last year -- something that MAKO investors should feel good about.

Not every trend is good, however. MAKO took a $1.2 million expense in the fourth quarter due to excess inventory, and total inventory on hand climbed around 2% for the quarter. Inventory concerns won't sink MAKO by any means, but it's still a sign that the company's sales aren't picking up fast enough to meet expectations -- or even its own manufacturing.

From explosive growth to long-term value
In our technologically evolving world, it seems almost certain that we will see medical robotics as standards of the health care industry one day. MAKO's fellow robotics maker Intuitive Surgical (NASDAQ: ISRG  ) , the gold standard of the industry today, has shown just how successful this trend can be. Where Intuitive once struggled for profitability, it now posts strong double-digit margins and a stock that has soared more than 73% in the last two years.

But MAKO isn't Intuitive -- the two operate in highly different fields -- even though many investors simply lumped the robotics companies together and expected the same sort of growth story. MAKO and fellow small-scale robotics firm Hansen Medical (NASDAQ: HNSN  ) have taken their time posting growth, meandering through the woods of unprofitability and disappointing impatient short-term traders. Not all medical robotics firms are alike, and it's time we changed our view on just what MAKO Surgical is.

MAKO isn't the home-run, give-me-money-now growth story that will set the health care sector on fire -- not any more. This is a company aiming for the long term, with plenty of cash on hand as it reaches for profitability. MAKO will one day capitalize on swelling obesity rates and the aging of the baby boomers that will drive up America's elderly population.

Those trends point toward a growing need of orthopedics care in the future, and with companies like orthopedics rivals Johnson & Johnson (NYSE: JNJ  ) and Smith & Nephew (NYSE: SNN  ) taking heat for hip implant recalls, it's a perfect time for MAKO to cement its niche in the industry before the demographics boom arrives. MAKO's nowhere near the size of the titanic Johnson & Johnson -- despite the recalls, health care's leviathan still boasts an orthopedics division that saw more than $7.7 billion in sales in 2012, far more than MAKO can even dream of now. But Smith & Nephew should be in MAKO's sights. The company announced after its most recent earnings that it would look to reduce exposure to orthopedics, offering an opportunity for MAKO to continue expanding into the market.

That won't lead to immediate sky-high growth like Intuitive, but if MAKO can continue its upward trajectory, this stock could be one to shine for long-term investors.

MAKO: The growth of a growth stock
Has MAKO's story changed? Certainly, but that doesn't mean there isn't value in this developing company. RIO sales aren't setting the world on fire, but with procedural growth picking up nicely, the MAKOplasty application installation rate climbing, and long-term demographic trends in the orthopedics industry's favor, MAKO's still a pick worth considering. It's easy to forget this stock has only been publicly traded for five years; MAKO's still a young gun not about to die, despite the hammering of its shares over the past year.

MAKO may still be finding its footing, but for long-term investors, this developing company is worth a look.

Zero to hero?
Sitting near all-time lows, has MAKO Surgical's robotic surgery growth story rusted over? To help investors answer this question, 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.



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