Is Intuitive Surgical Undervalued?
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By rwhunter1
March 26, 2007

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I have several metrics that I use to value growth stocks with, all of which point to ISRG being undervalued. Here's a list, pick your favorite. I am using a share price of 121.76, cash per share of 8.9, next year earnings estimate of 3.5/share and next five year growth estimate of 35%.

Keep in mind, all growth for ISRG will now be reflected in their earnings per share numbers. This was not the case last year as it was the first year that they had to pay taxes, so on an EPS number, it looked like the EPS was decreasing all the while revenues and cash from operations was growing like crazy. I believe this is what has held the stock back this past year, this headwind is not present anymore, all growth will now be reflected in EPS increases.

1) Earnings Yield vs. ten year bond yield
ISRG Earnings Yield is 1/((121.76 - 8.9)/3.5) = 3.1%
Ten year bond currently yields 4.5%. Not bad considering all of the growth that is ahead for ISRG. If I buy a 10 year bond today, I'll still be getting a 4.5% return ten years from now. How much money will ISRG be making 10 years from now? Even if it only grows 10% a year for the next ten years, ISRG will be beating the ten year bond.

2) PEG
ISRG Next Year PEG = ((121.76 - 8.9)/3.5)35 = 0.92.
Any great growth stock with a PEG below 1.0 is a screaming buy. Many growth stocks trade in a PEG range from 1 - 2. a PEG of 2 would put the price at $265/share. This would definitely be a range that I would look to sell my shares, but wow, what a gain that would be!

3) Discounted Cash flow model.
I use two different models here, One quite conservative, and one a little more aggressive. I usually average the two to find a fair value price. When I do this I get a fair value of $135 per share. Keep in mind, as ISRG increases their earnings by about 35% the next two years, this is going to be moving up. End of next year fair value will be 182, and the following year it will be 246, if current growth estimates hold to be true.

4) S&P Stock report.
It currently have a 4* buy rating with a price target of $135 (They also use a discounted cash flow model). Note however, that they have had this price target for over a year now. I'm guessing this target will be increasing as well in the near future.

I'll also throw in some technical analysis. The stock has been stuck in a range last year (90 - 130 or so). It was even a downtrend, which has now been broken. Connect all of the highs on a 1 year chart, you will see a clear downtrend that was broken with the surge from the last earnings report. It was broken at ~ $105. I don't believe that the stock will close below $105 anymore. If you are waiting for this stock to return to the below $100 or below $90 level, I don't believe that ISRG will ever see these prices again barring any unforeseen circumstances.

Full disclosure : I currently have invested my entire allocation that I will be putting into this stock with a cost basis of ~105. I have been investing in and watching this company for almost two years now.

I have seen a lot of posts on this board claiming that ISRG is overvalued, I'm sorry, the metrics that should be used to prove this point to just the opposite. ISRG is not overvalued, and should have been heavily bought anywhere at or below $105 per share during the past year. If you did this, hold your shares and enjoy the ride for the next couple of years.

If you did not do this, I still believe that your risk at this point is only 15 points down with some monster upside. I don't see ISRG going back below $105 anytime in the near future, again barring any unforeseen circumstances (patent issues, lawsuits, etc).

I hope this helps,

Good Luck to Everyone,


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