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Intuitive Surgical, Inc. Crushed Expectations: So Why the Drop?

Yesterday after the market close, Intuitive Surgical, (NASDAQ: ISRG  ) reported earnings that absolutely crushed expectations.

Naturally, investors in the robotic-surgery specialist were rewarded with a 6% drop this morning. So, what happened?

Here's what they said
Let's check out the numbers first.

Quarterly revenue decreased 5% year over year to $576 million -- a result driven by a 6% increase in instruments and accessories revenue to $268 million, but offset by the sale of "just" 138 da Vinci Surgical Systems for $205 million, or a 23% drop. But that still easily exceeded analysts' consensus estimates, which called for total sales of $548.56 million.

Meanwhile, thanks largely to Intuitive Surgical's share repurchase efforts, fourth quarter net income per share actually rose slightly to $4.28, compared to estimates for earnings of just $3.76 per share.

Here's what they didn't say
So, why the drop? 

First, keep in mind shares of Intuitive Surgical spiked by as much as 14% after the company preannounced those revenue figures early last week. As of this writing, the stock is still 5.4% higher than it stood the day before that announcement.

Second, and perhaps more importantly, Intuitive Surgical has chosen not to provide forward guidance for now. CEO Gary Guthart explained, "The combination of gynecology trends, the [Affordable Care Act] implementation in the United States, and uncertainty of future capital purchases in Japan creates difficulty in revenue forecast for at least the first half of 2014."

But while Mr. Market understandably hates this kind of uncertainty, I have to applaud Intuitive Surgical's prudence.

After all, there's little sense in taking a shot in the dark given the recent unprecedented changes in the health-care industry. And a bad prediction could not only destroy management's rapport with investors -- something MAKO Surgical shareholders in 2012 remember all too well -- but also add to their already troublesome legal matters with inevitable shareholder lawsuits if said guidance was far enough off base.

Here's the plan for 2014
Intuitive Surgical will obviously continue to support global growth in its core gynecology and urology procedures, but its eyes are also set on grabbing a larger chunk of the fast-growing general-surgery market -- notably with both colorectal and single-incision procedures -- which grew 93% over the last year alone.

In fact, according to Guthart, general surgery overtook urology as the second largest category of da Vinci use in the United States last quarter.

Outside the U.S., Intuitive will look to maintain strong sales momentum in Europe, which played a huge role in 2013 helping international procedures and systems sales grow 21% and 59%, respectively. And though Japan also helped drive those numbers upward last year, management asserted capital sales there will remain unpredictable until 2016, when potentially favorable revisions in Japan's national health care coverage are slated to kick in.

Foolish takeaway
For now, investors are left with a stock that still doesn't look particularly cheap trading around 25 times last year's earnings. But when you back out Intuitive Surgical's enviable $2.8 billion cash pile -- which grew by another $222 million last quarter, by the way -- its trailing P/E ratio falls to 20.

That may not seem extraordinarily cheap, but I think it's a well-deserved premium considering we're still talking about a solidly profitable business that enjoys a massive head start in a cutting-edge industry. In the end, that's why I'm convinced today's pullback represents a fantastic buying opportunity for patient, long-term investors.

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Read/Post Comments (7) | Recommend This Article (10)

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 January 24, 2014, at 3:26 PM, dealmaker83 wrote:

    You are wrong. I like MF, but they tend to be loyal to a fault. Meaning if they've made money in a name, they keep justifying the reasons for poor performance.

    This company is in a big time deceleration mode...laid off 3 sales people in one region in last 3 months. Are paying for training. Having major adoption issues on single site. A cost of $40k...allowing it to be negotiated down by two thirds. Spending tons of time on trying to turn the negative sentiment around. The surgeons who are trying to get single site are having major approval issues. Hospital boards don't want anything to do with this machine right now. The universities and hospitals that want and can support a 2 million dollar machine have them. Some of those aren't happy about the purchase either. Also, many da vinci surgeons aren't adequately trained. The techniques that surgeons develop over time and multiple cases aren't going through this natural process. Proctors who were getting between 10/15 events in the first half of last year are now getting 1/2 in the last 8 months.

    Companies demanding this multiple need to be growing, this one isn't and it has changed swiftly and drastically. My price target is 275 per share and this is the only company I'm bearish on, but it is well deserved. I really hope nobody buys at these levels, your assessment is really off.

    I really look forward to being able to agree on the next one.

  • Report this Comment On January 25, 2014, at 8:23 AM, garybutler347 wrote:

    Can't sell razor blades if no one is buying your razors. YOY sales of robotic systems down. Accessories and ancillary services up. Seems like they are trying to squeeze more from existing customers in a period of declining system sales. This is not the behavior of a growth company. Inadequate volume creates safety and efficacy issues from a user 's perspective. That massive cash hoard may merely be a legal defense fund given the outstanding lawsuits. The multiple is entirely undeserved at these levels. The company is currently uninvestable on the long side. Price target $200.

  • Report this Comment On January 26, 2014, at 12:36 PM, 123spot wrote:

    Mr. dealmaker and Mr. butler, you are looking at this as merely a business and overlooking it as a medical revolution that is unstoppable. That lack of appreciation will constrain your profits, I'm afraid. Spot

  • Report this Comment On January 26, 2014, at 1:37 PM, dealmaker83 wrote:

    Do you operate on one spot? Do you perform any procedures on a a da vinci, do you know anyone who does? Truthfully, the best thing about the robot is it's not restricted and has 360 degree movement. The latest issue of ContemporaryOB/GYN has "Do we really need the robot" on the cover. At these levels, it's overpriced and not growing like it had. 've moved on to other real growing companies. I'm afraid you're late to the party. I've made money on this name, but the party is over for now. Entire hospital systems are negative on it now. When it drops to a reasonable price, I'll gladly pick more up from people like you who have sold. Enjoy

  • Report this Comment On January 26, 2014, at 11:20 PM, 123spot wrote:

    Party. Well, there's your problem. Spot

  • Report this Comment On January 27, 2014, at 2:17 PM, dealmaker83 wrote:

    This is the cover for Contemporary OB/GYN--On the cover it says "DO WE REALLY NEED THE ROBOT" not exactly the kind of question you want on the cover of a leading physician magazine, and continues to support the idea that this company was really disingenuous on the call about guidance, and maybe even dishonest. I think they learned from the last July sell off that investors won't take a slowing company at that premium. $275 PT seems a bit generous now. I've made money here so I'll give them a little, but it's an absolute sell at this level. Enjoy

  • Report this Comment On January 27, 2014, at 4:38 PM, tom2727 wrote:

    Yes, but notice how the cover of that magazine says "THE ROBOT"? Notice how they don't need to specify which robot they are talking about? That's because ISRG currently has a monopoly.

    I don't feel comfortable predicting what ISRG will earn next year,or how many systems they will sell. Just like I can't tell you where the DOW or S&P500 will be in a year.

    But I do feel comfortable making these 2 predictions:

    1) Robotic surgery is the future of surgery.

    2) ISRG will be the 800lb gorilla of robotic surgery.

    But before they get to be the 800lb gorilla, there actually needs to be another smaller gorilla competing with them. There is none right now.

    I'm holding ISRG at a trailing PE of 24 right now, and given that my time horizon is 10 years+, I have no problem sleeping at night.

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