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Better Buy: Intuitive Surgical (ISRG) vs. Align Technology (ALGN)

By Brian Stoffel – Nov 12, 2018 at 8:17AM

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It all comes down to one thing: patents. Find out who that benefits.

To say it's been a great decade to be a medical device company would be a vast understatement. As technology makes the procedures we need to live longer lives safer and more efficient, the companies behind them -- and their investors -- have enjoyed handsome profits.

That's certainly been the case for the two companies we're evaluating today: robotic surgery specialist Intuitive Surgical (ISRG -0.29%) and dental-focused Align Technology (ALGN 2.06%). Over the past five years alone, each has quadrupled in price. 

Medicine doctor's hand touching computer interface as medical network connection with modern virtual screen

Image source: Getty Images

But which is the better stock to buy today? Here are three different facets we can evaluate them on to come to an informed decision.

Financial fortitude

We want to know that if and when tough times hit, the companies we're invested in can survive. That's why financial fortitude is so important. Keeping in mind that Intuitive Surgical is valued at over three times the size of Align, here's how the two stack up.

Company Cash Debt  Free Cash Flow
Intuitive Surgical $4.6 billion $0 $1.0 billion
Align Technology $0.6 billion $0 $0.24 billion

Data source: Yahoo! Finance. Cash includes long and short-term investments. Free cash flow presented on trailing twelve month basis.

The big-picture takeaway is that both of these companies are very solid. In fact, they not only have fortitude, but I would call them "antifragile" -- they could actually benefit from market downturns. With sizable war chests, solid cash flows, and absolutely no long-term debt, they could acquire rivals or buy back shares on the cheap when the opportunity presents itself.

In fact, just this week Align announced it would be doing just that.

Overall, I don't think there's that much space between these two -- they're both in very solid shape. But if forced to choose, i would side with Intuitive Surgical, as it has been buying back shares and growing its cash hoard at a record pace over the past three years.

Winner: Intuitive Surgical

Valuation

The next metric to evaluate is price. This can be a difficult concept to pin down, as no one figure gives a holistic picture of how "expensive" a stock is. That said, here are four numbers I like to look at when evaluating price.

Company P/E P/FCF  P/S PEG Ratio
Intuitive Surgical 49 59 16.5 3.1
Align Technology 47 77 10.5 1.9

Data source: Yahoo! Finance, E*Trade. P/E calculated using non-GAAP earnings where applicable.

As with financial fortitude, these two are very closely matched. Intuitive Surgical trades for a demonstrably lower price-to-free-cash-flow, while Align's PEG Ratio (which takes growth rates into account) sits at a much lower multiple.

Overall, I'd give the edge here to Align, especially since the stock was almost cut in half last month.

Winner = Align Technology

Sustainable competitive advantages

But by far the most important thing for any long-term investor to evaluate is the sustainable competitive advantage -- or moat -- of the underlying company they are buying.

Intuitive Surgical's moat comes primarily from the fact that there are over 4,700 daVinci robotic surgical systems installed throughout the world. With each system comes a hospital that was willing to put down over $1 million for the machine, and a group of doctors committed to learning the machine and tinkering with new operations where it can be used.

That creates two important dynamics. First, it leads to high switching costs: Once a hospital or doctor commits to daVinci, they want to continue using it to utilize the time and money they've put in. Perhaps more importantly, as more doctors tinker with more ways to use the machines to improve patient outcomes, more potential procdures will crop up for the company. That creates vast multiple futures over the next 10 years.

Align also has the advantage of winning over dentists in droves. It has discovered that when a dentist uses the clear Invisalign molds with patients -- instead of traditional braces -- and does so at scale, it can be profitable for the dentist and more convenient for the patient. 

The problem is that the patents which are the cornerstone of the company's moat have started expiring. Although that doesn't necessarily mean that the company is toast, it definitely means that the company's moat is narrower than Intuitive's.

Winner = Intuitive Surgical

And my winner is...

So there you have it: While Align's share-price cut gives it a more enticing valuation, Intuitive's long-term moat protection makes it a far better choice at today's prices. That's why the company has been a long-term CAPS pick in my profile, as well as a 5% allocation in my real-life portfolio.

Brian Stoffel owns shares of Intuitive Surgical. The Motley Fool owns shares of and recommends Align Technology and Intuitive Surgical. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Intuitive Surgical, Inc. Stock Quote
Intuitive Surgical, Inc.
ISRG
$190.52 (-0.29%) $0.56
Align Technology, Inc. Stock Quote
Align Technology, Inc.
ALGN
$222.43 (2.06%) $4.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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