Better Buy: Intuitive Surgical vs. Medtronic

These big companies will soon compete against each other. Here's how they stack up for investors now.

Keith Speights
Keith Speights
Dec 23, 2018 at 9:01AM
Health Care

A battle is coming between Intuitive Surgical (NASDAQ:ISRG) and Medtronic (NYSE:MDT). For years, Intuitive Surgical had the robotic surgical systems market all to itself. But now there are other companies in the space. These rivals include Medtronic, which plans to launch a system in 2019 that will compete directly against Intuitive's da Vinci surgical robot.

Intuitive Surgical has delivered the more-impressive stock performance in 2018 and in recent years. But which of these two stocks is the better pick for investors now?

Physician with palm held upward and robotic surgery text appearing over his hand

Image source: Getty Images.

The case for Intuitive Surgical

There are two primary arguments for buying Intuitive Surgical shares:

  1. The market for robotic surgical systems will grow significantly in the future.
  2. Intuitive Surgical's head start gives it a compelling advantage.

The first premise seems to be right on target. There's no question that the market for robotic surgical systems has grown a lot over the last few years. The number of procedures for which Intuitive's da Vinci systems have been used has basically doubled since 2012 -- and the rate of growth has accelerated over the last couple of years. 

More important, though, are a couple of factors that should expand the market even more. One is the long-term trend that should translate to dramatic growth in the use of surgical robotic surgery: aging demographics in countries across the world.

The numbers of older individuals are rapidly increasing in the U.S., Europe, and Asia. Because older people tend to require surgical procedures more frequently, the demographic trends should translate to higher demand for robotic surgery.

In addition, technological advances are expanding the types of surgical procedures that can be performed with robotic assistance. Intuitive Surgical, for example, hopes to soon receive Food and Drug Administration clearance for a new surgical robot product that can obtain lung biopsies.

And that leads us to the second premise for buying Intuitive Surgical. The company has an install base of more than 4,800 systems. Every customer that has implemented a da Vinci system has a strong motivation to maximize its return on investment. Also, Intuitive Surgical's long track record of safety and value should give it a leg up over its rivals in winning new customers. 

The case for Medtronic

So what are the arguments for buying Medtronic? Piper Jaffray laid out a pretty good case for the medical device stock earlier this year. I'd summarize the case for Medtronic with two key points:

  1. Its solid financial position enables the company to reward shareholders.
  2. It has strong new products coming out to drive growth.

Medtronic certainly appears to have a solid financial position. And there are three ways the company can use its financial strength to help shareholders.

The most obvious way, of course, is to continue paying a dividend. Medtronic's dividend currently yields a respectable 2.1%. The company is a member of the elite group of Dividend Aristocrats, having increased its dividend for 41 consecutive years.

Another way Medtronic helps shareholders is with stock buybacks. The company repurchased nearly $2 billion worth of shares in the first half of 2018. 

While dividends and share repurchases are nice, there's nothing like good, old-fashioned growth. The third way that Medtronic's financial position benefits shareholders is all about growth. The company has used -- and likely will continue to use -- its money to make strategic acquisitions. One such deal that further establishes Medtronic in the surgical robot arena is its purchase of Mazor Robotics, which makes robotic surgical systems for spinal surgery.

Acquisitions tie into the second reason for buying Medtronic stock, but the company also has new products developed internally that are fueling growth or are likely to do so soon. Its Evolut PRO transcatheter aortic valve replacement (TAVR) system, Valiant Navion thoracic stent grafts, and forthcoming surgical robot system are good examples.

Better buy

Both of these stocks should be solid winners over the long run. But I think the better pick is definitely Intuitive Surgical.

The decision comes down to growth prospects. Intuitive Surgical should enjoy stronger growth than Medtronic will. Even factoring in Medtronic's dividend and stock buybacks, the opportunities for Intuitive Surgical still make it the more attractive choice.

It's true that it will face more competition, including from Medtronic. However, the market for robotic surgical systems should be large enough to support multiple players. And the competitive advantages for Intuitive Surgical mentioned earlier will likely keep the company on top for a long time to come.