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3 Key Things I’ll Be Looking for When Intuitive Surgical, Inc. Reports Next Week

By Brian Stoffel - Jul 14, 2016 at 10:05AM

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Forget the top and bottom lines. These three aspects are the most telling of Intuitive Surgical's health.

Image source: Intuitive Surgical.

A rising stock price can erase all sorts of painful history. It wasn't long ago when investors in robotic-surgery specialist Intuitive Surgical (ISRG 1.30%) were reeling. Hospital spending on daVinci systems in the United States was falling, and serious questions were being raised about the future of the company's most-popular procedure.

But that was then, and this is now. Intuitive Surgical's stock is routinely flirting with all-time highs and is up over 90% since mid-2014. With the company's second-quarter earnings release scheduled for next Tuesday after the market closes, here are the three things that I, as a long-term shareholder, will be watching closely.

Is procedure growth still strong?

There's no variable more responsible for Intuitive Surgical's recent success than the company's impressive ability to increase the number of procedures performed using the daVinci.

Create column charts. Chart source:

For nine consecutive quarters, the company has not only seen procedures grow, but that growth has been accelerating. Entering 2016, management had forecast procedure growth for the year between 9% and 12%; but after the company's monster first quarter, it upped that guidance to 12% to 14%.

While it might be somewhat of a letdown to see growth slow down from last quarter's 17%, I'll be more than happy with 12% growth. This is a long-term story that has lots of catalysts for growth -- more on that below -- and we shouldn't forget to put next week's numbers in context.

What does management have to say about hernia and colorectal procedures?

The key behind Intuitive's procedure growth comes from a category labeled as "U.S. General Surgery." This is a catchall for procedures (1) not performed internationally, and (2) not in urology or gynecology. While the company doesn't break down numbers for specific procedures in "U.S. General Surgery," it's well known that hernia operations and, to a lesser extent, colorectal procedures are driving this growth.

Company CEO Dr. Gary Guthart said last quarter that the company expects daVinci to increasingly be used to improve patient outcomes in hernia operations:

Trends in U.S. general surgery growth continued with strong growth in inguinal hernia repair and ventral hernia repair followed by continued growth in colorectal surgery. Customer feedback and commitment to the use of daVinci in performing inguinal hernia repair for complex conditions has been encouraging in the quarter, increasing our confidence in its long-term acceptance. 

I will be listening closely to the company's conference call for further color on trends in hernia and colorectal procedures, as well as the potential for the daVinci to be used more often in thoracic procedures -- a stated goal of Intuitive for 2016.

Any hangover from Brexit?

Another one of Intuitive's stated goals for 2016 was to "drive our organizational capabilities in markets in Europe and Asia." As I've already shown, Europe is the smallest of Intuitive's markets, and the company isn't any more vulnerable to a Brexit-related slowdown than any other global company.

That being said, there are two important factors to consider. First, last quarter, Guthart singled out "solid performance in the United Kingdom," as a factor in the company's international growth. Furthermore, Japan is one of Intuitive's most mature markets. Following the Brexit vote, the Japanese yen gained significantly versus the dollar.

There are two opposing ways this could affect Intuitive. On one hand, the Japanese economy could suffer as the country's exports become more expensive. On the other, Bloomberg notes that: "The gains the yen has made will benefit a large and growing portion of Japan's population: the elderly. This group spends an outsize portion of their budgets on energy, food, and pharmaceuticals -- items that are often imported and therefore made less expensive by the yen's rally."

I'll not only be looking for management to parse out how international growth was affected by Brexit, which is inherently short-to-mid-term, but I will also be interested in how they see the new world order potentially affecting business moving forward in the long term. Of course, there are a host of other variables that will be important to watch -- things like revenue growth and earnings per share. But for long-term investors, these three will be the most-telling aspects as to the health of Intuitive Surgical.

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