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Better Buy: Intuitive Surgical vs. Johnson & Johnson

By Keith Speights – Updated Apr 10, 2019 at 11:20AM

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Which stock wins in a matchup between these two longtime healthcare winners?

Intuitive Surgical (ISRG -2.38%) is best known for its da Vinci robotic surgical system. Johnson & Johnson (JNJ -1.85%) might be most famous for its consumer healthcare products. But there's a lot more to picking between these two stocks than just comparing robots and Band-Aids.

There are two important questions to answer in choosing Intuitive Surgical over J&J or vice versa. First, what are each company's growth prospects? Second, what position is each company in to capitalize on those growth prospects? Here's how Intuitive Surgical and Johnson & Johnson stack up in these key areas.

Man with hands on hips looking at arrows on a wall facing left and right

Image source: Getty Images.

The outlook for Intuitive Surgical

The sky appears to be the limit for the robotic surgical systems market. Perhaps the most important demographic trend -- aging populations across the world -- should drive the numbers of surgical procedures higher, including the types of procedures that are most applicable for robotic assistance.

There remains significant variability of outcomes in surgical procedures. Studies have found that the bottom quartile of surgeons has three times as many complications as the top quartile. Use of robotic surgical systems can help reduce this variability.

Intuitive Surgical has dominated the robotic surgical systems market for years with its da Vinci system. The company is likely to stay at the top even though potential rivals, including Johnson & Johnson, are threatening to challenge its position.

Through the years, Intuitive has built a large customer base and a solid track record. Both are important for the company to stay No. 1 and generate strong growth for years to come. Existing customers aren't likely to switch to another robotic surgical system, because they have a financial incentive to maximize their investment on da Vinci. New customers could prefer Intuitive Surgical over rivals because newer products could seem riskier than going with a tried-and-true system.

The company can't simply rest on its laurels, though. The good news is that Intuitive Surgical is doing anything but that. Intuitive recently won FDA clearance for its newest robotic surgical system, ION, which is used to obtain lung biopsies in a minimally invasive procedure. The company also launched 80 new products in its da Vinci ecosystem between 2015 and 2018.

Intuitive Surgical isn't showing any signs of weakness right now. The company reported 17% year-over-year revenue growth in Q4, with earnings jumping 14% higher than the prior-year period. Intuitive had cash, cash equivalents, and investments of $4.8 billion at the end of 2018, putting it in great shape to invest internally in research and development or make strategic acquisitions. 

Check out the latest earnings call transcripts for Intuitive Surgical and Johnson & Johnson.

The outlook for Johnson & Johnson

Johnson & Johnson is more than 260 companies rolled into one. These companies operate in three broad areas -- consumer healthcare, medical devices, and pharmaceuticals. 

All three of J&J's key areas of focus should benefit from growth from the same aging trends that will help Intuitive Surgical. However, the company's biggest moneymaker is and will likely continue to be its pharmaceuticals business segment.

J&J has its challenges. Sales for the company's top-selling prescription drug, Remicade, are falling because of competition from biosimilars. In December, J&J's share price plunged after Reuters reported that the company may have known for more than 60 years that its baby powder and other talc products were contaminated by asbestos.

The strength of J&J, though, is in its diversification. While Remicade is important, it generated only 6.5% of the company's total sales last year. 

J&J has also weathered storms in the past and will probably do the same with the issues surrounding its talc products. CEO Alex Gorsky said in the company's Q4 conference call that the company remains "committed to ensuring the facts about talc are understood, and we will continue to defend the safety of our product." He added later that the talc issues don't affect the strategic outlook for its consumer business over the long run.

Johnson & Johnson has several pharmaceutical products that should contribute to its overall growth for years to come, including blood cancer drugs Darzalex and Imbruvica. The company continues to make acquisitions to boosts all of its core businesses, including a recently announced buyout of robotic surgical systems developer Auris Health.

Few companies generate the amount of cash flow that J&J does. It uses its cash in several ways that reward shareholders, including $5.9 billion of stock buybacks last year and boosting its dividend for 56 consecutive years.

Better buy

If you're an income-seeking investor, Johnson & Johnson is the clear choice between these two stocks. The healthcare giant's dividend currently yields north of 2.6%, while Intuitive Surgical doesn't have a dividend program at this point.

However, if you're looking for growth, Intuitive Surgical is the better pick. Although Intuitive doesn't have the robotic surgical systems market to itself as it did for several years, the company appears to be well-positioned to retain its leadership in the marketplace and generate solid growth for a long time to come.

Keith Speights owns shares of Intuitive Surgical. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool has a disclosure policy.

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