An analyst on yesterday's earnings call with Intuitive Surgical (Nasdaq: ISRG ) management asked why the company hadn't repurchased any shares in the first quarter; it didn't buy back any shares in the previous quarter, either, despite having $568 million in board-authorized buybacks.
The response from management was interesting. Gary Guthart, Intuitive Surgical's CEO and president, quoted Warren Buffett's recent letter to Berkshire Hathaway's shareholders, saying repurchases are best when these two conditions are met:
- The company has ample funds to take care of the operational and liquidity needs of its business.
- Its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated.
Guthart concluded, "I think [Buffett] says it right. I think we are happy to emulate his behavior here."
Following Buffett is quite Foolish --with a big F -- in my opinion, but investors should be wondering which of the conditions Guthart thinks isn't being met, if not both.
Clearly, Intuitive Surgical has no problems with cash to cover operations; the company added nearly $200 million to the bank account in the last quarter, bringing cash and investments to $2.4 billion. That's a lot, but if Intuitive Surgical was going to buy something the size of MAKO Surgical (Nasdaq: MAKO ) with a market cap of $1.8 billion, that doesn't leave much wiggle room. Maybe it's a liquidity issue, although I'd argue that a large acquisition wouldn't be the best move for Intuitive Surgical at this point. It's proved that it can drive value-developing products, so if it decided to diversify, a company like spine-surgery expert NuVasive (Nasdaq: NUVA ) would be a better option and clearly affordable even if some of the cash were spent on repurchasing shares. And if it wanted another robotic specialist, Hansen Medical (Nasdaq: HNSN ) with its Sensei system for catheter placement has a market cap under $200 million.
The more likely issue is that management doesn't think its shares are cheap at the moment. After the first-quarter earnings of $3.50, Intuitive Surgical trades at a P/E of 45. Repurchasing shares would reduce the P/E because earnings per share would go up -- but not by a whole lot. Each dollar spent on a buyback would essentially yield 2.2%, only slightly better than Intuitive Surgical can get holding it in the bank.
Does that mean you shouldn't buy Intuitive Surgical at this price? I don't think so. The company is still growing rapidly. Procedures were up 29% year over year, and Intuitive Surgical is just getting started with new products including single-site incisions for removing gallbladders and Firefly Fluorescence for kidney surgeries. Intuitive Surgical probably isn't "selling at a material discount to the company's intrinsic business value, conservatively calculated," but just because it isn't Buffett-dirt-cheap doesn't mean it isn't still a good buy.
Two of David Gardner's six signs of a Rule Breaker are that it has had strong past price appreciation and that it's been called overvalued. Intuitive Surgical hits both. You can read about the other four and one company he thinks has big potential in the Fool's free report, "Discover the Next Rule-Breaking Multibagger."