Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Intuitive Surgical (NASDAQ:ISRG) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Intuitive Surgical's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Intuitive Surgical's key statistics:

ISRG Total Return Price Chart

ISRG Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

70.7%

Pass

Improving profit margin

17.8%

Pass

Free cash flow growth > Net income growth

65.4% vs. 101%

Fail

Improving EPS

98.9%

Pass

Stock growth (+ 15%) < EPS growth

33% vs. 98.9%

Pass

Source: YCharts.
*Period begins at end of Q3 2010.

ISRG Return on Equity (TTM) Chart

ISRG Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(1.6%)

Fail

Declining debt to equity

No debt

Pass

Source: YCharts.
*Period begins at end of Q3 2010.

How we got here and where we're going
We looked at Intuitive Surgical last year, when it earned six out of seven passing grades, but it has lost one of those passes in its second assessment to finish with five out of seven possible passing grades for 2013. While gains in net income have surpassed free cash flow growth during our three-year tracking period, Intuitive's nominal trailing 12-month free cash flow has yet to fall below net income during this time (although it is close after the company's latest earnings). This is an excellent performance, but can Intuitive recover its lost passing grade and stop the slide that's hurt it since this summer? Let's dig deeper to find out.

Intuitive Surgical's stock has been battered by worse-than-expected third-quarter results, which included the first year-over-year quarterly revenue decline in company history, coming on the heels of an underwhelming second quarter this summer. Fool contributor Rupert Hargreaves notes that the FDA's initiated an investigation on Intuitive's da Vinci surgical robotics systems, after it found several discrepancies in its incident reports. As a result, quarterly sales of the da Vinci declined from 155 units to 101 units, a drop that can only be partly blamed on slowing demand for medical devices in the U.S. Intuitive may have underperformed compared to recently acquired MAKO Surgical (UNKNOWN:MAKO.DL) and Accuray (NASDAQ:ARAY) over the past year, but it remains the 800-pound gorilla among these industry peers.

ISRG Total Return Price Chart

ISRG Total Return Price data by YCharts

My Foolish colleague Dan Caplinger notes that the Obamacare has already had a huge impact on the U.S. health care industry, as companies face an additional 2.3% tax on medical devices. Hospitals have also faced substantial cuts in Medicare reimbursement and steeper penalties for failing to comply with certain readmission guidelines. As a result, hospitals have been hesitant to spend large amounts of cash on Intuitive's robot systems, which typically cost more than $1.5 million apiece. Hedge fund Lone Pine Capital recently sold its stake in Intuitive for $430 million, citing anemic sales growth of yjr da Vinci systems in the U. S. The new Obamacare restrictions have also forced fellow medical-device maker Stryker (NYSE:SYK) to slash around 1,170 jobs, while Edwards Lifesciences sold its Sapien heart valve segment to maintain its dominant position in the U.S markets.

Intuitive has also been facing fierce competition from more specialized surgical robot makers like Accuray and MAKO Surgical, which was recently acquired by Stryker for $1.65 billion. Fool contributor Leo Sun notes that MAKO's robotic surgical arms -- the RIO system and MAKOplasty Total Hip Arthroplasty -- help surgeons treat osteoarthritic diseases with minimal invasiveness, while Accuray's cancer treatment systems such as CyberKnife and TomoTherapy have been in demand because of their unmatched advantages over chemotherapy and other standard treatments. Johnson & Johnson and Covidien have also introduced new surgical treatments that are faster and cheaper than Intuitive's da Vinci system. The combination of new regulatory restrictions and tougher competition could very well undermine Intuitive's position as one of the best health care stocks heading into 2014.

Putting the pieces together
Today, Intuitive Surgical has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Covidien, Intuitive Surgical, and Johnson & Johnson and owns shares of Intuitive Surgical and Johnson & Johnson. 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.