At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the best ...
When it comes to the emerging field of robotic surgery, there are three key names investors tend to focus on: Intuitive Surgical (NASDAQ:ISRG), MAKO Surgical (UNKNOWN:MAKO.DL), and Hansen Medical (NASDAQ:HNSN). As it so happens, all three of these companies made news last week. But there's no question which of the three came out of the week looking better than all the others: Hands down, it was Intuitive.
On Thursday, you see, a report filtered out of Bloomberg announcing that the U.S. Food and Drug Administration has begun asking questions about "complications" surgeons experience when using Intuitive's da Vinci surgical robots. Worries that this could turn into something serious sparked an immediate 11% sell-off in the stock Thursday -- a sell-off that quickly morphed into a buying frenzy Friday, when several analysts leapt to the company's defense:
- William Blair: "We firmly believe that [da Vinci] is safe and effective, and that the recent concerns about increasing rates of complication are to be expected with any medical device."
- Cantor Fitzgerald: This is all a "gross overreaction" to the FDA news.
- Mizuho Securities: "Reports" of problems with da Vinci have "actually declined over time."
- Janney Capital Markets: The stock is going back up, so buy it quick. "If management felt that there needed to be an explanation on the issues, they would've been much more aggressive in managing the Street's expectations."
Cantor itself took that advice to heart, changing its rating on Intuitive to "buy" in response to Thursday's sell-off. And as luck would have it, Cantor made its call just in time to catch the stock's rebound Friday. By the time markets had closed for the weekend, the stock had gained back 8.5%, and closed above $553.
You've heard about the best. But what of the rest?
Mirroring Intuitive's topsy-turvy week, MAKO Surgical and Hansen Medical took opposite directions last week -- despite reporting remarkably similar news events.
On Tuesday, MAKO reported losing $0.13 a share (two cents worse than forecast) on weaker-than-expected revenues. Regardless, a large increase in surgical procedures using the company's products got investors excited enough to bid up the shares by 16% over the ensuing two days. (Which seems a strange reaction to a reported loss.)
One day later, Hansen reported a loss as well but encountered a much different reaction from investors. They sold off Hansen shares by 7% after the company delivered a $0.35-per-share loss when "only" a $0.14 loss had been expected. Revenues, at $4.3 million, were simultaneously negligible, and also about 27% worse than expected.
Of the two reports, Wall Street reacted only to the first, with Oppenheimer cutting its price target on MAKO Surgical, citing an "uncertain macro environment." (Funny, though, how things don't seem to be quite so uncertain over at Intuitive Surgical.) Of course, Oppenheimer still thinks MAKO shares should be worth $13, in spite of the uncertainty.
Investor reactions notwithstanding, one thing seems crystal clear here: Of the three companies, only Intuitive Surgical is currently reporting profits, generating cash, and selling real products to real customers in quantities sufficient to make it a viable business. Meanwhile, analysts who follow MAKO and Hansen still don't see either company earning a profit this year, or next year, or even the year after that.
Make no mistake: Despite what I've pointed out, I'm still not a fan of Intuitive Surgical's stock. At 35 times earnings, and a price-to-free cash flow ratio only a little bit cheaper than that, the stock is grossly overpriced for the 18% long-term earnings growth it's expected to produce over the next five years.
Regardless, there's simply no question that in relative terms, Intuitive Surgical is "the best" robotic surgery company out there. As for MAKO and Hansen -- despite what their fans may say, neither one of these companies deserves the title of "the next Intuitive Surgical." They might eventually get bought out and turned into subsidiaries of Intuitive Surgical.
On the other hand, they could just as easily get competed out of existence by the real Intuitive Surgical.
The Motley Fool recommends Intuitive Surgical and MAKO Surgical and owns shares of Intuitive Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.