This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Will MAKO make you rich?
Good news for fans of robotic-surgery specialist MAKO Surgical (Nasdaq: MAKO  ) this morning. Up on Wall Street, someone likes your stock. The bad news? That "someone" is Mizuho Securities.

Bright and early Tuesday morn, the Japanese stock-picker predicted a bright future for this maker of orthopedic surgical arms. Within a year, this $42 stock will hit $52 -- a clean 30% profit. But how likely is that to happen, really?

Let's go to the tape
Judging from Mizuho's record to date, not very likely. Mizuho's been making public stock predictions in the sector for only about four months now, but already it's racked up a record as one of the worst stock-pickers on Wall Street. Barely 35% of its recommendations manage to outperform the market. The average pick underperforms the S&P 500 by more than 4 percentage points. Hardly inspiring.

And although I suppose you'd expect me to like this week's recommendation at least (MAKO is, after all, an official recommendation of Motley Fool Rule Breakers), the truth is that I'm not impressed with MAKO's performance at all.

Why not? Let's start with the analogies. Like Rule Breakers' famous -- and successful -- recommendation Intuitive Surgical (Nasdaq: ISRG  ) , MAKO is a player in the fast-growing world of robot-assisted surgery. MAKO's aim: to improve the quality of orthopedic care, minimize the need for bone removal during surgery, and maximize the effectiveness of orthopedic implants. Broadly speaking, improving care with robots is an objective shared by Intuitive, and also by former Rule Breakers rec Hansen Medical (Nasdaq: HANS  ) , a robotic catheter operator.

But here's the problem: When you drill down into the financials, MAKO bears much closer resemblance to Hansen than to Intuitive. It's unprofitable for one thing, and while growing quickly, it still works off a tiny revenue base -- so small that MAKO's $1.8 billion market cap equates to a very optimistic valuation of 21 times annual sales. MAKO's also burning cash like mad, its $39 million in trailing negative free cash flow actually a bit worse than the $36 million than Hansen burnt last year. (In contrast, Intuitive generated close to $595 million in positive free cash flow last year.)

180 degrees opposite of good
While Intuitive is doing a lot right in the robotic surgery space, MAKO seems intent on taking a different path. Despite growing revenues strongly in recent quarters, there's little improvement evident in the company's GAAP profits, or its free cash flow, either. It's done so bad, in fact, that unlike Intuitive Surgical, which consistently exceeds expectations, MAKO has managed to disappoint Wall Street in four of the past six quarters, reporting losses significantly worse than it was "supposed" to report.

Despite this history of consistent underperformance, however, investors have bid up MAKO shares by 65% over the past 12 months -- a number literally 10 times better than what investors in the broader S&P 500 have had to content themselves with.

Foolish takeaway
Listen, Fools. I'm all in favor of free money, and if Mr. Market wants to offer ever-higher prices for MAKO stock, despite the utter lack of justification for the run-up -- I say "great! Take the money!" But let's not get greedy. Let's not forget that the purpose of a business is to earn profits, and that MAKO has consistently failed to do anything of the sort.

My advice: Ignore Mizuho's advice. Don't buy MAKO Surgical today, but instead take the money and run.

That's what I'd do, and that's why right here, right now, I'm publicly making a prediction that MAKO Surgical will underperform the market from here on out -- and I'm rating the stock "underperform" on CAPS for that reason. (Think I'm wrong? Follow along.)

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Motley Fool newsletter services have recommended buying shares of Intuitive Surgical and MAKO Surgical, but Fool contributor Rich Smith owns no shares of of (nor is he short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 360 out of more than 180,000 members. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (11) | Recommend This Article (11)

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 April 03, 2012, at 9:41 PM, ggunnr1 wrote:

    MAKO's operating expenses grew 45% from 2010 to 2011. MAKO's revenue grew 90.78% and gross margins expanded from 58% to 68% (which is where they will most likely remain) over the same period.

    I don't think comparing HNSN to this is at all appropriate.

    At this stage for MAKO, performance is measured by RIO sales, procedures, and procedures per RIO growth. MAKO needs to continue rapidly driving adoption of its technology. It's the same model as ISRG. Once MAKO sells a RIO to a hospital, the procedures act as a recurring cash machine.

    MAKO has $50 million and no debt. Profits will likely come within the next 2 years, and their is a very good chance the $50 million will be enough until they get there.

    Profitability for MAKO today would be a terrible idea. MAKO would basically have to shut down new RIO sales/manufacturing for them to get there.

  • Report this Comment On April 03, 2012, at 10:38 PM, grbbiker wrote:

    10 divided by 42 is not a 30 % return. 52 divided by 42 is not 1.3. not that a 24 % return is all that bad.

    does ggunnr1 have any forecast on the cash flow or earnings? if 39m was burned last year, then having only 50m on hand is not really reassuring, but i still like the promise of growth.

  • Report this Comment On April 04, 2012, at 12:52 AM, TMFSymington wrote:

    Quick note that jumped out at me as I read your article: You're comparing MAKO (today) to ISRG (today). The oft-used comparison between the two, however, doesn't (and shouldn't) compare the two in their current state. MAKO is most like ISRG circa 2004...just as ISRG stopped burning cash and diluting shares and was propelled into the black by their recurring revenue from parts sold b/c of the increasing number of monthly procedures.

    This doesn't mean MAKO won't have a bumpy ride in the meantime, and certainly doesn't mean Mizuho is a good stock picker. With regard to MAKO, though, your "circa today" comparison between the two companies is terribly off-base. To me, then, this seems to illustrate you don't understand where ISRG came from (and, correspondingly, where MAKO is headed).

  • Report this Comment On April 04, 2012, at 9:37 AM, ggunnr1 wrote:

    @grbbiker

    FY2012 cash burn guidance is 30 million. That implies an operating expense increase of about 25% from 2012 using analyst estimates of $129.4 million in revenue.

    My model has revenue growing 50% to 194 million for 2013. Assuming operating expense increase of 25% again for 2013 (which I think might be lower if anything), cash burn is going to be in the $15-$17 million range.

    I'm estimating another 50% in top line growth for 2014, which puts it at $291 million. Operating expenses grow 25% again, operating income will be somewhere in the $11-$13 million range.

    I haven't broken it down quarter to quarter; I imagine Q1 might be a narrow loss, but the rest of 2014 will be profitable. It's going to be close, but I think $50 million is going to make it.

    With the same model...2015, 2016, 2017 operating income will be $64, 139, and 258 million. With a 40 p/e in 2017 that makes MAKO a 10 billion dollar company.

    I realize how imprecise this all is. Just guesstimates. But I believe that they are reasonable.

    I appreciate any feedback.

  • Report this Comment On April 04, 2012, at 9:59 AM, gs77 wrote:

    Exactly

  • Report this Comment On April 04, 2012, at 10:07 AM, Borisbmx wrote:

    In the December quarter Mako increased pretax gross profits > 150% to $22.5 million. As Mako meets 2012 revenue estimates the PS ratio is more like 12x to 14x. According to management Mako is funded well enough to avoid a secondary while advancing towards breakeven. Insurance covers the procedure and customer demand is high. Whats not to like?

  • Report this Comment On April 04, 2012, at 10:36 AM, TMFDitty wrote:

    Fair points, all. Something else to consider, though: If you were as close to running out of cash as ggunnr1 suggests, and your stock had run up 60-odd percent in the past year, would you risk running out, or grab the chance to issue new shares at the high stock price?

    Responsible management, I submit, would play it safe and dilute sooner rather than run the risk of having to dilute at a lower share price later.

    TMFDitty

  • Report this Comment On April 04, 2012, at 10:56 AM, TMFSymington wrote:

    @TMFDitty: Valid point. I suppose the additional dilution is the biggest question, then. In the end, though, I'm still convinced (even if they do need to dilute to stay afloat) it's a matter of when, not if, they start making money.

    The fact that they're not issuing new shares at current prices does make me wonder; does current management know they won't need to? Are things progressing faster than we're expecting?

    I also feel a little added confidence knowing both co-founders of Intuitive Surgical serve on MAKO's board of directors...

  • Report this Comment On April 04, 2012, at 11:18 AM, ggunnr1 wrote:

    TMF Ditty,

    Dilution in 2012 does not seem likely given the CFO's comments in the last CC.

    2013...maybe...but I don't think there is too much uncertainty over the next couple of years with cash burn. They already doubled their manufacturing capacity in November 2011, and CEO stated this should be enough for the next few years. I think that leaves the only real uncertainty to hirining and expanding sales.

    If there is going to be any additional dilution to raise cash, they are not going to need very much.

    I wonder if a small loan would even make sense at the time.

    -ggunnr1

  • Report this Comment On April 04, 2012, at 6:35 PM, TMFDitty wrote:

    Might make sense, but looking at their balance sheet I get the sense MAKO is not a loan-taking shop. They seem more comfortable operating debt-free.

    TMFDitty

  • Report this Comment On April 04, 2012, at 8:40 PM, obga18 wrote:

    im not taking recommendations from anyone who cant even get their ticker symbols right... its HNSN .... who is screening these articles at fool? or they on spring break like me too?

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