Is Intuitive Surgical's Growth Sustainable?

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.

Next up in our series is Intuitive Surgical (Nasdaq: ISRG  ) , one of David Gardner's very best picks for Rule Breakers -- a multibagger that has forever changed technology's role in surgery and treatment, and by extension altered the stature of medical technology as an investment class.

No longer are biotechs the only option for rebellious health care investors. Device and instrument innovators such as Accuray and Cyberonics possess similar multibagger potential.

Foolish facts

Metric

Intuitive Surgical

CAPS stars (out of 5)

****

Total ratings

3,842

Percent bulls

94.1%

Percent bears

5.9%

Bullish pitches

618 out of 657

Highest rated peers

Shamir Optical Industry, Cutera, Vision-Sciences

Data current as of Sept. 1.

Most, but not all, Fools love Intuitive Surgical. Here's a closer look at the bear case, as presented by CAPS investor kachingg:

[Intuitive Surgical's technology] does improve recovery but not long term outcome. physicians and hospitals do not receive higher reimbursement for using it. In fact, it is expensive and wastes hospital budget and taxpayer money on procedures that can be just as easily performed by laparoscopy.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

61.8%

22.4%

38.8%

Revenue growth

39.9%

20.3%

45.6%

Gross margin

72.5%

71.4%

71%

Receivables growth

11.1%

20.7%

30.5%

Shares outstanding

39.4 mil.

38.5 mil.

39.2 mil.

Source: Capital IQ, a division of Standard & Poor's.

Bearish arguments notwithstanding, there's little in this table that's worth quibbling with. Let's review:

  • As the bold text shows, net income growth is accelerating after a dip in 2009. That's a good sign; it suggests continued demand for the daVinci robot.
  • Gross margin is high and rising. As an innovator and market leader, Intuitive Surgical appears to possess pricing power.
  • Shares outstanding are stable, which suggests that management is funding growth through existing free cash flow. (A job they're good at: return on capital has increased to 19.6% over the trailing 12 months.)

Competitor checkup

Competitor

Normalized Net Income Growth (3 yrs.)

Hitachi (NYSE: HIT  )

9.1%

Intuitive Surgical

48.8%

Olympus Corp.

(19.8%)

Toshiba Corp.

(28.7%)

Sources: Capital IQ. Data current as of Sept. 1.

Going by this table, Intuitive Surgical is well ahead of larger peers in capitalizing on its market opportunity. To a degree, this is to be expected. Intuitive Surgical is a specialist and Hitachi is as much a force in data storage as it is medical devices. Olympus also makes cameras, and Toshiba computer equipment.

And yet this table says something extremely important about Intuitive Surgical. While revenue and income growth is high, it's also accelerating. Investors buying today are buying into a growth story.

Grade = sustainable
My guess is Intuitive Surgical will keep expanding. Robotic surgery is precise, less invasive, and allows experts from anywhere to perform complex procedures. There are simply too many benefits for me, a business-focused investor, to ignore. That's why I've rated the stock to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Intuitive Surgical at these levels? Would you make it one of our 11 O'Clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 O'Clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Intuitive Surgical is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


Read/Post Comments (3) | Recommend This Article (19)

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 September 02, 2010, at 2:41 AM, frankiedatoe wrote:

    I believe that Intuitive Surgical is still a foolish buy!!!

  • Report this Comment On September 02, 2010, at 10:20 AM, TMFThump wrote:

    I've heard many of the arguments against ISRG and find most of them to be very anecdotal and focused on a single aspect of the technology rather than a full picture of its benefits, track record, and expanding capabilities. The comments of kachingg are fairly typical -- high cost and comparable long term outcome versus laparoscopic surgery.

    When evidence is conclusive that patients hospital stays are shortened by 2-5 days in every procedure DaVinci is used for, it suggests that the cost argument (against ISRG) isn't taking all factors into account. Regarding the long term outcome, the evidence is again conclusive that there are fewer complications with robotic surgery. Patients rarely have to be subjected to additional treatment for infections as they do with conventional techniques.

    What excites me most about the potential for ISRG is the breadth of the community that will contribute to the tremendous growth story. Medical schools are pioneering new procedures, particularly in cancer treatment, and instructing more new physicians in the use of DaVinci. Patients seek hospitals utilizing this technology. They don't need much convincing of the benefits. Going home in two days or less and being able to resume a normal diet immediately is the best possible news. Insurance companies in most cases dictate what procedures are covered and those that are not. Is it in their financial interests for patients to have the shortest possible hospital stay? If you have any doubts, ask any mother who's recently delivered a baby, and you'll get an earful. Lastly, the hospitals that are investing in the technology will most certainly find ways to get a return on their investment.

    The most significant impediment ISRG faces is not from any lag in adopting the technology, it's the potential for a serious threat to their technological superiority surfacing. Today the worst thing about owning ISRG is being the "I" in Jim Cramer's cheesy CANDIES acronym.

  • Report this Comment On September 10, 2010, at 12:49 PM, cooolbabu wrote:

    ISRG has a great product that will sell very well for a long time. As a investor, I am more concerned with valuation.

    Couple of years ago, when ISRG was a baby, announced it sold something like 60+ machines, it was BIG news. Stock doubled up in 3 months.

    It's grown up now. There are risks. P/E of 35+ and PEG of 1.4 seems appropriate. I hoped to see why it is undervalued to make an investement.

    Yes, ISRG has a great product. So does RIMM. It's the future that counts.

    Show me the money.

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