Why Intuitive Surgical Inc. Shares Were Sliced

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Intuitive Surgical (NASDAQ: ISRG  ) , a developer of robotic surgical soft tissue device systems under the da Vinci brand-name, dropped as much as 10% after the company issued its preliminary first-quarter guidance after the bell last night.

So what: According to its press release, Intuitive Surgical anticipates revenue for the first quarter will be approximately $465 million, down 24% from the $611 million reported in the year-ago period. By comparison, Wall Street had been expecting nearly $537 million in revenue. The specific culprit appears to be da Vinci systems revenue, which is expected to decrease by approximately 59%, to $106 million from $256 million in the first quarter of 2013. Intuitive blamed this steep drop on lower demand in the U.S. for its machines, as well as $26 million in deferred revenue, which won't be accounted for this quarter. The company also announced a pre-tax earnings charge of $67 million against its first-quarter earnings, reflecting what it believes to be the estimated cost to settle a number of legal claims against the company.

Now what: Yet again, Intuitive Surgical's earnings report won't even be in the ballpark with Wall Street's expectations, which has to be getting a little frustrating from the perspective of shareholders of this previously fast-growing robotics company. While I do believe that the overhang from the ongoing investigation into the safety and efficacy of its da Vinci surgical system by the Food and Drug Administration had something to do with the drop in demand, I suspect Obamacare played a key role, as well. I believe that the uncertainty surrounding sign-ups (i.e., would the 7 million enrollment number be met?) led many hospitals to holster their disposable cash when it came to larger-ticket items like the da Vinci surgical system, which costs close to $1.8 million. However, with Obamacare's enrollment figures meeting the administration's original expectations, I also believe Intuitive has the tools needed to surprise in the second quarter to the upside – especially with its newly updated Xi surgical system ready to launch. Keep your eye on Intuitive Surgical.

Intuitive Surgical's new device gives the company plenty of potential this year, but the company still could struggle to keep pace with this rapidly growing top stock
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  • Report this Comment On April 10, 2014, at 10:29 PM, BillFromNY wrote:

    Over the few years that I have subscribed to Rule Breakers, I have never owned ISRG, but I have certainly noticed that is has acted as the Poster Child of RB, a constant reminder of the brilliance of David Gardener and staff. The RB mantra of holding on to stocks of known fundamentally sound companies that meet RB criteria has never varied.

    But I find myself wondering if RB is going too far in treating the trials of ISRG as just more bumps in the road. Interactive Surgical looks like it could really be headed for trouble and, if RB agrees with me, they should let their members know.

    The legal attacks against the robotic surgery, serious each in damaging the company's reputation, will further have hospitals questioning purchases of Da Vinci. Most of these lawsuits always end in costly involvement of the hospital (the old legal maxim "Sue Everyone.")

    Direct problems don't seem to get much worse than having sales of systems declining at the same time as the number of procedures per sold system are also declining. If you are an ISRG investor, and you have not already done so, check out the commentary of "gatorswamp," a professional surgeon very familiar with da Vinci, on the ISRG board.

    I think that RB investors in Intuitive Surgical are entitled to at least one lengthy, well-researched article on why they should not be concerned with recent disclosures and should just keep on holding.

    And if the authors of the article should find that ISRG is no longer a company in the vanguard of a revolution in surgery, impervious to long-term criticism, perhaps they should let members know so that they can cut their losses.

    Let there be a debate on the wisdom of starting a position in a "core" stock no matter how highly it is valued, though RB knows a painful correction is there waiting around the corner that may be too hard for some subscribers to handle emotionally and will cause them to make mistakes lethal to their hard-earned cash. Rule Breakers, despite its many bright researchers and analysts, does not yet, I believe, count Warren Buffett among its employees.

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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and in investment planning topics. You'll usually find him writing about Obamacare, marijuana, developing drugs, diagnostics, and medical devices, Social Security, taxes, or any number of other macroeconomic issues.

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