Why the Buyback, Intuitive Surgical?

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A year ago I would have thought it was crazy, but today it doesn't sound like that bad of an idea. Intuitive Surgical (Nasdaq: ISRG), the hyper-growth company that's grown revenue by 57% annually over the last five years, is buying back stock.

$300 million worth of stock, to be exact, which is quite a bit considering that it's only a $3.5 billion company. Half of the stock will be repurchased and retired within the next two weeks through an accelerated share repurchase (ASR) plan. The other half will be used for the company to nibble on in the open market when the price looks good.

Intuitive Surgical has become a cash-generating machine raking in over $215 million in free cash flow last year. It has to do something with all that cash because leaving it sitting in the bank earning low interest rates sure isn't helping EPS that much. For high P/E companies, buybacks are usually a crazy idea, but with Intuitive Surgical's P/E beaten down to 18, the buyback will have a positive effect on EPS as long as the company is getting less than about 5.5% interest on its cash.

What Intuitive Surgical didn't do tells us more about the company's plans than the buyback itself. By not setting a regular dividend, management is signaling that it's not a mature medical device maker like Johnson & Johnson (NYSE: JNJ) or Medtronic (NYSE: MDT), and still has a lot of growth left in it. This is a one-time use of cash because of the low stock price and slower growth in the near term.

Management also didn't go out and use the cash on a purchase. That probably shouldn't surprise too many investors who have followed the company. It has a pretty large moat without any real competition. In fact CEO Lonnie Smith said on last quarter's conference call that there weren't really any companies to buy that would help the near-term or even long-term growth of the company. It could go out and buy a beaten-down company in a related medical device field, such as Hansen Medical, Stereotaxis (Nasdaq: STXS), Integra LifeSciences Holdings (Nasdaq: IART), or Accuray Inc. (Nasdaq: ARAY), but that would move it away from its core competency.

Sitting tight and waiting for hospital capital spending to pick up again might just be the best move for the Motley Fool Rule Breakers pick. Intuitive Surgical has only committed a third of its cash and equivalents to the ASR plan and doesn't have to use the rest, so it's still got plenty of dry powder to use if circumstances change or when it begins to expand again.