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Better Buy: Intuitive Surgical, Inc. vs. Johnson & Johnson

By Keith Speights – Oct 16, 2016 at 1:02AM

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Growth or dependability? That's the big choice for investors to make when selecting between Intuitive Surgical and J&J.

Image source: Getty Images.

You might think that there are probably few healthcare companies that have less in common than Intuitive Surgical (ISRG 4.89%) and Johnson & Johnson (JNJ 1.01%). Intuitive Surgical is best known for its da Vinci robotic surgery systems. J&J is probably best known for its diverse lineup including consumer products like Band-Aids and prescription drugs like Xarelto. However, these two companies have more in common than meets the eye.

Intuitive Surgical and Johnson & Johnson both develop products to assist with minimally invasive surgeries. Both stocks have been very successful, too. In fact, over the past five years Intuitive Surgical and J&J shares have increased by nearly the exact same percentage (87% and 84%, respectively). But which of these two healthcare stocks is likely to perform better in the future? Let's see how Intuitive Surgical and J&J compare.

The case for Intuitive Surgical

Growth, growth, and more growth. That's the reason investors love Intuitive Surgical. 

In the first half of 2016, Intuitive Surgical's revenue increased by 13% year over year. Earnings were up almost 39% compared to the prior-year period. The company reported solid growth in shipments of its da Vinci surgical systems and procedures performed with the system in both the first and second quarters.

What's especially great for Intuitive Surgical about all of this growth is that it makes higher revenue for the future much more likely. The company generates around half of its total revenue from selling additional instruments and accessories to existing customers. The more da Vinci systems in use, the more additional instruments and accessories Intuitive Surgical will sell.

Can Intuitive Surgical continue to grow? Wall Street certainly seems to think so. Analysts estimate the company's earnings will increase at an average annual rate of 14% over the next five years. That's considerably higher than Intuitive Surgical's 8.5% annual earnings growth rate achieved during the past five years. 

The company's growth strategy hinges primarily on two goals. First, Intuitive Surgical plans to increase the share of surgical procedures performed using its systems. While a high percentage of prostate and malignant hysterectomy surgeries in the U.S. are performed using robotic systems, relatively few colorectal surgeries and hernia repairs are done with robotic assistance. Second, the company is working hard to increase its sales outside the U.S., especially in Europe and Asia.

I think Intuitive Surgical will succeed on both fronts. The number of scientific peer-reviewed publications related to da Vinci has increased significantly over the last few years. Most of these publications were written independently of the company. As Intuitive continues to make the case for the safety and advantages of its robotic surgical systems, the company should be able to increase its percentage share of different procedures and grow even more outside the U.S.

The case for Johnson & Johnson

While the investing argument for Intuitive Surgical centers primarily on growth, the case for Johnson & Johnson is more geared toward dependability. J&J has been around since 1886. The company has not only consistently paid dividends, but it has increased its dividend for 54 consecutive years. It can also boast of 32 years in a row of adjusted earnings increases. As I said, Johnson & Johnson is dependable.

One of the key ways that J&J has been able to turn in such a steady performance over a long period of time is its diversified product line. Its consumer products include a long list of well-known brands, including Benadryl, Listerine, and Tylenol. J&J's pharmaceutical portfolio includes 10 current blockbuster drugs, led by autoimmune-disease drugs Remicade and Stelara. The company's medical devices business focuses on multiple areas: cardiovascular, diabetes care, diagnostics, orthopedics, surgical instruments, and vision care.

Investors, though, have likely encountered the warning that past performance is not indicative of future results. Johnson & Johnson claims an impressive track record, but can the healthcare giant continue to do well into the future? I think it will.

J&J's primary growth driver is its pharmaceuticals segment. In the second quarter of 2016, the company claimed a half dozen major drugs that grew sales by double-digit percentages compared to the prior-year period, with Simponi and Stelara chalking up the highest year-over-year growth.

Current drugs should continue to fuel growth while its pipeline produces new winners. And that pipeline appears to be quite strong. J&J has over 30 late-stage clinical studies in progress. The company plans to file for regulatory approval for at least 11 drugs within the next three years. 

The consumer products and medical devices business segments are also growing, although only slowly. Both units have suffered from Venezuela's currency devaluation, but that's a short-term issue. While neither of these business segments is likely to achieve growth of the same pace as J&J's pharmaceuticals business, they still generate billions of dollars each year in sales and earnings. 

Better buy

A head-to-head matchup between Intuitive Surgical and Johnson & Johnson is kind of like the fabled race between the tortoise and the hare. Intuitive Surgical is definitely the hare, while J&J is the tortoise. But remember who won the race? The tortoise.

I really like Intuitive Surgical and view it as an excellent choice for investors. However, I think the better long-term buy is Johnson & Johnson. Its steady dividends and earnings growth make a potent combination. Like the tortoise, J&J tends to win races in which it competes.

Keith Speights has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool recommends Johnson and Johnson. We Fools may not 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.

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