3 Words to Sum Up Where Intuitive Surgical Is and Where It's Heading

Though advancements in the medical field have been dizzying over the past century, the actual process of performing surgery has remained somewhat stable: Doctors open the body and fix what needs to be fixed. Of course, that's an oversimplification, but it also helps explain why Intuitive Surgical (NASDAQ: ISRG  ) -- with its daVinci Robotic Surgical system -- has been able to grow its shares by almost 2,000% since going public in 2000.

But for newly minted shareholders, the ride hasn't been nearly as enjoyable. After another disappointing earnings release, I'll cover the three key concepts to know when evaluating if Intuitive Surgical is the right stock for you.

1. Obamacare
The Affordable Care Act, or Obamacare, has created a lot of uncertainty in the medical community. What will cost structures look like? Are insurers going to pay less for operations, or will they remain stable? There's absolutely no way to know. And when it comes to planning expenses, the only thing worse than bad news is uncertainty -- and that's what Obamacare seems to have created.

Of course, this uncertainty won't last forever, but while it hangs over hospitals' heads, it only makes sense that they will be far more conservative with their capital purchases than in times past. Since inception, 71% of Inuitive's da Vinci machines sold worldwide have been in the United States. Knowing that sales in the U.S. have an outsized effect on earnings, take a look at what the onset of Obamacare has done for Intuitive:

Source: SEC filings.

2. Doubt
But Obamacare alone isn't responsible for the entire shortfall. There are other factors at play. Foremost among those factors is a serious level of doubt being raised within the medical community about the efficacy and cost-effectiveness of the da Vinci's use in hysterectomies.

The doubt first surfaced with a report appearing in the Journal of the American Medical Association early this year. Specifically, researchers questioned whether using the da Vinci -- and its higher costs -- was a value proposition worth taking. The president of the American Congress of Obstetricians and Gynecologists later echoed those concerns.

This doubt about the efficacy of robotic surgery with hysterectomies has led to much slower growth in procedures than the company has seen in the past, especially in benign gynecology.

How big of a deal of is this for the company? Take a look at what a huge chunk of overall procedures were gynecological in nature and performed in the U.S. last year.

Source: SEC filings.

3. Innovation
But all is not lost for investors. In fact, if you don't own shares of Intuitive Surgical  and are interested in the company, now might be a good time to take the dive.

The main reason I say this is because the company innovative to its core. It has offered a completely different way to perform surgery, and it benefits both from the development of new products and from experimentation within the medical community that could lead to a greater diversification of procedures than it has today.

In the long run, the medical community's hesitation could result in a win-win situation. Intuitive is even more incentivized to ensure that there is serious value in using the da Vinci for hysterectomies -- which, in the end, will be better for the company, doctors, and patients.

If you plan on holding this stock for decades, I think we'll look back at this year as a hiccup.

Is there value here?
It's a little difficult to compare Intuitive to peers, as it really doesn't have many. The closest may come from the likes of Strkyer (NYSE: SYK  )  -- which recently announced it was acquiring MAKO Surgical -- and reconstructive implant specialist Zimmer Holdings (NYSE: ZMH  ) .

If we look at some standard metrics, we see that Intuitive isn't a screaming buy right now, and is slightly more expensive that its "peers."

 

Intuitive

Stryker

Zimmer

Price-to-Earnings

22

18

16

Price-to-Free-Cash-Flow

21

17

19

Expected 3 Year Earnings Growth Rate

12%

10%

11%

Sources: SEC filings, E*Trade, Yahoo! Finance.

Intuitive is one of the biggest medical stocks in my portfolio, accounting for over 4% of my portfolio. I'm not buying more shares right now, but I'm certainly not selling, either. But I think it's worth investigating other plays within the medical field, like biotech.
 

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