The Best Stocks for 2010: Intuitive Surgical

Intuitive Surgical (Nasdaq: ISRG  ) never looks cheap. Then again, growth stocks usually don't. This isn't your daddy's value stock.

The purveyor of robotic systems that assist doctors in performing surgery has had a roller coaster of a year. At a P/E near 60, there's a lot of growth priced into the stock, but it looks like its regaining its legs -- and I think it'll do fine in 2010.

Not for the faint at heart
While Intuitive Surgical is up 261% off its low for the year, that's partially deceiving because the company has a fairly high beta. High-beta stocks tend to rise higher in the good times, but they also fall farther when the bear roars its ugly head.

Company

Beta
(3-year)

(Fall) From
2007 Highs

Increase From
2009 Low

Sirius XM Radio (Nasdaq: SIRI  )

2.15

(99%)

1054%

Las Vegas Sands (NYSE: LVS  )

4.67

(99%)

1002%

Ford (NYSE: F  )

2.77

(85%)

580%

Advanced Micro Devices (NYSE: AMD  )

2.12

(91%)

428%

American Express (NYSE: AXP  )

2.27

(85%)

323%

Intuitive Surgical

1.89

(76%)

261%

Citigroup (NYSE: C  )

2.98

(98%)

249%

S&P 500

1

(58%)

69%

Source: Motley Fool CAPS and Capital IQ, a division of Standard & Poor's. As of Dec. 28.

Most of those stocks are still well off their 2007 highs -- remember a 50% increase doesn't cancel out a 50% drop. Of the stocks listed above, only Ford has completely recovered to 2007 levels. But Intuitive Surgical is within striking distance of its all-time high as investors have some confidence that the company can get back to the crazy revenue growth that topped 60% annually in years past.

You can't have one without the other (for very long)
Intuitive Surgical has three main forms of revenue. It sells da Vinci systems used to perform surgeries and service contracts to repair the installed systems. It also sells disposable instruments used by the system. In other words, it's a variation of the standard "razor and blade" model made famous by Gillette.

The difference is that Intuitive Surgical isn't giving away the razor. In fact, at a cost of more than $1 million each, the company saw a substantial slip in the number of da Vinci systems sold in 2009, as hospitals didn't have the capital to buy them.

Surgical procedures, on the other hand, galloped along at their usual stellar rate.

Change

Q1 2009

Q2 2009

Q3 2009

(Decrease) in system sales (YOY)

(11%)

(11%)

(5%)

Increase in procedures (YOY)

60%

52%

49%

Source: Company press releases. YOY = Year over year.

The only way to account for the discrepancy in growth rates is that hospitals are increasing their usage of the system(s) that they own. Instead of doing one procedure per day, for instance, perhaps they've upped it to two. That can only last for so long; there's only so many hours available in a day.

Besides, once different departments start fighting for time on the system, hospital management is bound to pony up for a new machine to keep the cash-cow surgeons happy. In fact, the procedure growth may already be forcing hospitals to increase the number of da Vinci machines they own. In the third quarter, about 25% of new installations went to repeat customers, including a sixth system to Methodist Medical Center in Houston.

Earning its keep
Intuitive Surgical isn't a slam dunk. The company needs to increase revenue growth back near the 60% level it's seen previously in order to justify its current valuation. Unlike a value play where investors just need the pessimism to go away to profit, Intuitive Surgical actually has to deliver.

Investors should keep an eye on the procedure growth. As long as Intuitive Surgical can keep it up, revenue growth is bond to rebound. Eventually.

Think Intuitive Surgical has what it takes to slice and dice its way to the top in 2010? Vote in our poll and then check back when the finalists square off.

Which is the best stock for 2010? See all 13 candidates here.

Find out why Intuitive Surgical has been recommended four times by the Motley Fool Rule Breakers newsletter. Click here to grab a free 30-day trial subscription and get the latest issue as well as access to the archives.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. American Express is a Motley Fool Inside Value recommendation. The Fool's disclosure policy is scared of machines with sharp instruments -- especially the office paper shredder.


Read/Post Comments (4) | Recommend This Article (22)

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 December 30, 2009, at 12:32 PM, waveonshore wrote:

    Maybe not for the faint of heart but my gut feeling is that airlines will be the big winners in early 2010. Fuel costs should fluctuate in a narrow range, load factors are up and higher margin fliers are returning.

  • Report this Comment On December 30, 2009, at 5:29 PM, ISRGer wrote:

    With quarterly revenue growth and operating income growth approaching 30% per quarter in a poor economy, ISRG has been a big winner for me over the years and since I first purchased it in 2001. The da vinci operating machine is protected against competition and most hospitals in my area own more than one machine. Ironically, the success of the machine has triggered a big need for exiting owner hospitals to buy more and da vinci sales have continuedd to grow. More importantly, is the simple fact that existing user of the da vinci always utilize consummable items also produced and sold by ISRG. Moreover, ISRG's R & D efforts are continuing and who knows if or when another block buster product will come along. Thank you da vince for my increased net worth which I expect will continue to grow along with ISRG's net sales and net. worth.. .

  • Report this Comment On January 01, 2010, at 10:36 AM, texasflyfish wrote:

    I have seen this picture with another health company I used to own. It is tricky to keep up good growth numbers when you stop selling the high dollar units and transition to selling just the service or disposables. The new "health reform" bill about to be passed also throws a cloud over medical device manufacturers. My personal feeling is that there is not enough reward in ISRG to justify the risk.

  • Report this Comment On January 15, 2010, at 4:16 PM, weiwentg wrote:

    ISRG is a great stock, but I sold about half my position. I think it's overvalued. I don't believe it will see revenue growth approaching previous levels for some time - hospitals just don't have access to enough capital.

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