Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



One Medical-Device Stock I Just Bought

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Welcome to my portfolio, MAKO Surgical (Nasdaq: MAKO  ) . I've had my eye on you for a while, but now I'm ready to commit to a long-term relationship. I hope you stay a while.

I recently acquired a new position in the company because its robotic orthopedic surgery system, the RIO, is accelerating sales while its MAKOplasty procedures performed for minimally invasive knee surgery take off. MAKO earns revenue every step of the way. The system itself generates sales, including for installation and training, while the company sells implants and disposable products used in the procedure. It also derives some revenue from warranty and maintenance services.

Can I get your digits?
Two out of three of these revenue sources are recurring: procedures and service. Last quarter, these two recurring revenue streams accounted for 49% of revenue, compared with 44.6% a year ago. Management sees recurring revenue constituting an increasing percentage of total revenue as the company leverages its growing installed base of RIO systems.

Quarterly MAKOplasty procedures performed have leapt 487% since the first quarter of 2009, going from 265 in that quarter to 1,557 in the second quarter of this year. The total commercial installed base of RIO systems has also more than quadrupled over the same time frame, from 20 to 86.

Source: 8-K press releases.

It's analogous to the razor-and-blade model, except traditionally those models make no profit on the razor and all the profit on the blades, whereas MAKO makes a healthy gross profit on its razor and even more gross profit on its blades. Last quarter, MAKO's gross margin on the RIO systems was 63.2%, and products and services boasted even higher gross margins at 77.6% and 80.8%, respectively. Each segment has expanded gross margin over the past year.

Going steady
The company hasn't been able to turn its red ink to black quite yet, and last quarter's $18.6 million in revenue -- an 81.2% increase -- resulted in a $9.9 million net loss. Selling, general, and administrative expenses are still disproportionately high since MAKO is still such a small company.

The quarter's $17.1 million in SG&A expense burned through the $13.1 million in gross profit and then some, and that's before you even include the $5 million in R&D. Still, the company has been strengthening its financial position, albeit with an equity offering last November.







Current ratio 0.97 1.90 3.92 9.54 6.37
Quick ratio 0.80 1.65 3.53 8.31 5.68

Source: 10-K annual reports.

MAKO is still a very small company, with a market cap of only $1.5 billion. It's competing against much larger rivals, including Stryker (NYSE: SYK  ) and Johnson & Johnson (NYSE: JNJ  ) , which also market orthopedic implants and knee-surgery products. The company has a long way to go if it ever wants to achieve Intuitive Surgical-esque (Nasdaq: ISRG  ) success. I'm not the only one who sees similarities between Intuitive Surgical and MAKO Surgical. Foolish colleague Brian Stoffel aptly calls Intuitive Surgical an "older, more mature version of MAKO."

I tend to begin my analysis with top-line revenue growth before making my way down the income statement, and MAKO is delivering on revenue growth. MAKO is a young company experiencing all the normal growing pains of fledgling growth stocks, such as net losses. As long as MAKO can continue ramping up its installed base and MAKOplasty procedure adoption, revenue will take care of itself and net profitability and margin expansion will follow.

As of June 30 this year, there have been 8,656 MAKOplasty procedures performed. The global opportunities are just beginning. Last year, one RIO system was sold to an Italian distributor and another to a South Korean distributor for demonstration and marketing purposes to try to tap into those respective markets.

I think MAKO Surgical has the potential to be a multibagger. I must give credit to our outstanding Rule Breakers team for finding this one before I took a deeper look. They sure know how to pick ‘em. Try any of our newsletter services free for 30 days, what do you have to lose? At very least, add this stock to your Watchlist.

Fool contributor Evan Niu recently purchased shares of MAKO Surgical, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Intuitive Surgical, MAKO Surgical, and Stryker and creating a diagonal call position in Johnson & Johnson. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (6)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1551192, ~/Articles/ArticleHandler.aspx, 10/22/2016 3:23:06 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 6 hours ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
ISRG $678.02 Down -3.80 -0.56%
Intuitive Surgical CAPS Rating: ****
JNJ $113.44 Down -1.43 -1.24%
Johnson and Johnso… CAPS Rating: ****
MAKO.DL $0.00 Down +0.00 +0.00%
MAKO Surgical CAPS Rating: ****
SYK $113.71 Down -0.84 -0.73%
Stryker CAPS Rating: *****