Foolish Forecast: Try to Keep Up With Intuitive Surgical

Tonight, we'll get the fourth-quarter earnings report from robotic-surgery specialist Intuitive Surgical (Nasdaq: ISRG  ) . The Motley Fool Rule Breakers pick has a history of cutting analysts down to size with blowout earnings numbers, but will things be different in the shadow of a pending recession? Check out the numbers from the third quarter, flesh out that story with some human insight, and then come back here for the latest scoop.

What Fools say:
Here's how Intuitive Surgical's CAPS scoring rates against some of its peers and competitors.

Market Cap (Millions)

Trailing P/E Ratio

CAPS Rating (out of 5)

Hitachi (NYSE:HIT)

$24,290

81.2

**

Toshiba

$21,680

17.1

***

Boston Scientific (NYSE:BSX)

$17,830

73.2

**

Intuitive Surgical

$9,334

78.4

****

Integrated Surgical Systems

$2

1.1

-

Data from Yahoo! Finance and Motley Fool CAPS on 1/30/08.

If you couldn't tell from that table, let me tell you that it's hard to find a bona fide competitor for this company. Boston Scientific is on the list because it's a major supplier of traditional surgery supplies, and the rest are only planning to develop robotic-surgery tools. You might as well throw in Johnson & Johnson (NYSE: JNJ  ) on the merit of being an oft-rumored prospective buyer of Intuitive Surgical itself.

Our bullish CAPS players like the company for its first-mover advantage in a unique and very promising field, and they like to list the surgical procedures that a da Vinci robot can perform better than any set of hand-held scalpels and tongs can.

Most of the bears are just worried about the stock's valuation, but they still love the company. A lone exception in the crowd notes the lack of tactile feedback to the surgeon and says that the surgical benefits don't come close to outweighing the steep cost of the robots.

What management does:
Sales continue to grow even in lean times, when hospitals don't really feel like spending money on expensive upgrades. Why is that happening? Because the installed robot base still needs expensive disposable supplies to function, and the more practice the doctors get, the more disposables they use up. It's like the famous Gillette model -- you give away the handles and make a fortune selling the disposable blades.

Margins

6/2006

9/2006

12/2006

3/2007

6/2007

9/2007

Gross

67.7%

66.7%

66.5%

66.6%

66.5%

67.6%

Operating

30.5%

28.7%

28.8%

29.4%

30.7%

32.2%

Net

34.1%

29.5%

19.3%

19.9%

20.6%

22.7%

FCF/Revenue

16.0%

18.5%

22.5%

24.8%

26.9%

25.7%

Growth (YOY) 

6/2006

9/2006

12/2006

3/2007

6/2007

9/2007

Revenue

69.8%

65.7%

63.9%

55.8%

55.7%

57.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Intuitive's share price has dropped more than 27% so far in this young year, including 13% in the past week alone. In a strange turn of events, analysts actually expect the company to beat the Street estimates that they are responsible for generating, but then they think that revenue guidance for the coming year will be meek. And the stock looks expensive by any traditional measure, even after the recent fall: If you bought some shares a year ago, you're still sitting on a 139% gain today.

The valuation worry is a fair point, but I think the stock is trading at an appropriate price right now -- neither terribly expensive nor at a mouthwatering discount. It can still drop further, unless Intuitive manages to impress the analyst gang across the board with strong results and an optimistic update. Much like Apple (Nasdaq: AAPL  ) and VMware (Nasdaq: VMW  ) in very recent memory, even very good numbers might not be great enough, and the stock could be headed for another heart-pounding fall.

And then we step in and load up on cheap shares. After all, these guys still don't have any real competition, and we're not getting any younger -- or healthier.


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