Dueling Fools: Intuitive Surgical Bull

Just given the mere fact that shares of the mid-cap medical device maker Intuitive Surgical (Nasdaq: ISRG) are now 39% more expensive than they were last Thursday might make a bullish recommendation a tough sell to value investors. I mean, how much more upside can the April 2005 Motley Fool Rule Breakers pick possibly have? Taking into account that shares have already surged nearly 350% since this initial recommendation and that this stock is no longer flying beneath the radar, one would think that this juggernaut would be due for a market correction at some point.

I'm open to entertaining this argument, but I believe that this stock still has room to run and will continue to move up the charts in subsequent quarters. For its most recent fiscal quarter, Intuitive Surgical reported an 84% increase in operating income on a 61% rise in revenue. The resulting effect of these numbers included the company's market cap growing by $2.1 billion in a matter of days to its present level of $7.8 billion. Two key factors I believe will continue to drive this stock in the upcoming years are its cutting edge technology and the environment in which the company operates.

For investors unfamiliar with Intuitive Surgical, the company is engaged in the production and servicing of robotic surgical equipment. Its main product, the da Vinci Surgical System, is comprised of a viewing and control console and three or four robotic arms that are used to assist surgeons in carrying out an array of minimally invasive surgical procedures.

The system enables surgeons to conduct more precise surgical procedures while using smaller incisions than are possible with open surgery. The technology platform is essentially one of a kind, since Intuitive Surgical is the world's only provider of robotic-assisted surgical systems.

And aside from its own innovations, the company has teamed up with companies such as Medtronic (NYSE: MDT  ) and Johnson & Johnson's (NYSE: JNJ  ) Ethicon Endo-Surgery to form collaboration agreements that have further advanced Intuitive Surgical's product development and marketing efforts.

One could say that the company established its dominance in the industry when it acquired its chief competitor, Computer Motion, in 2003. This transaction would be the equivalent of Coca-Cola acquiring Pepsi, except on a much smaller scale, obviously. The merger agreement closed in the second quarter of 2003, in which Intuitive Surgical recorded its first profitable quarter, with $0.9 million in net income on $21.5 million in revenues.

The acquisition has since translated into megagains for Intuitive Surgical. Only one year subsequent to the transaction, it reported an increase in EPS of 180% on a 45% improvement in revenues. Probably the most important fallout of the merger was the fact that Intuitive Surgical had now cemented its position as the globe's sole maker of the only operative robotic surgical system cleared by the FDA to perform surgery.

The company has shown no signs of letting up in the quarters since this occurrence. It has reported revenue growth of 45% or more in each of its past 12 fiscal quarters. The momentum is expected to continue as the company now projects its full-year total revenues for FY 2007 to exceed its FY 2006 revenues by 45%-50%.

Given the rising demand for its da Vinci product line and the lack of formidable competition, the company has been able to maintain healthy product margins. Intuitive Surgical has consistently maintained a gross margin in the range of 65%-70% for each of the last eight quarters and expects to maintain gross margins in this range for the remainder of the year.

For a company consistently growing its sales by 50% and maintaining healthy product margins, it's hard to imagine that this stock has yet met its peak -- especially when all three of its principal business segments have been experiencing explosive growth and there remains ample growth opportunity for the da Vinci system abroad.

One Bear Stearns analyst has surmised that company sales could even approach $1 billion by 2009, as compared to $372.7 million in FY 2006. The premise also indicates that EPS could nearly double over this same timeframe. Should these events come anywhere near fruition, shares of Intuitive Surgical may prove to be undervalued in the long haul, with the most recent pop in its stock price serving as just the beginning of another bull run.

You're not done yet! Read the other arguments, and then vote for a winner.

Fool contributor Billy Fisher does not own shares of any of the companies mentioned. Intuitive Surgical is a Motley Fool Rule Breakers recommendation. Johnson & Johnson is an Income Investor pick. The Fool has a disclosure policy.

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