Why Intuitive Surgical Is a Buy After Reporting Q4 2019 Earnings

Connected healthcare company Intuitive Surgical (ISRG -1.21%) put the final wrap on 2019, reporting a strong finish to the year for the company's daVinci lineup of robotic surgery machines and related services. It's been an epic run over the last decade, and the still-nascent robotic-assisted surgery industry has plenty of open space ahead of it.

However, Intuitive's guidance to kick off 2020 left some investors looking for more, and the stock has pulled back over 7% from all-time highs as of this writing. A breather was perhaps in the cards after the 23% increase the stock notched last year, but short-termism looks to be setting up another buying opportunity for long-term shareholders.  

Image source: Intuitive Surgical.

A strong finish to a strong year

Intuitive's results accelerated in the final quarter of the year, with revenue and adjusted earnings growing 22% and 18%, respectively. Business was boosted by both a growth in worldwide procedures (which grew 16% year-over-year, driven by higher general surgery and urology), new daVinci machines placed in service (up 12%, with the total installed systems totaling 5,582 at year-end), and instrument and accessory sales (which increased 24%).  

It all added up to a great year for Intuitive, albeit one in which earnings grew slower than revenue as the company invested in new research to expand the types of procedures its robots can handle.

Pp = percentage point. Data source: Intuitive Surgical.  

As for the point regarding new machines, daVinci SP (which stands for single-port, designed for deep tissue access) and Ion (for lung biopsies) are early on in the sales cycle. Six SPs were installed in Q4, bringing the installed base up to 44, and the first three Ion systems placed in Q3 grew to an installed base of 16 by the end of Q4. New uses for both machines continue to be developed, as well as new instruments for the flagship daVinci X and Xi platforms. For example, the E-100 generator and SyncroSeal systems designed to help surgeons cut and seal tissue got FDA approval and began to be sold in the last quarter, and the new IRIS augmented reality system for imaging and analytics also began clinical use.

Don't sweat the early 2020 outlook

All of the new developments at Intuitive are well and good, but in spite of the upbeat news, guidance for the new year fell short of hopes. Total procedures using one of Intuitive's robots grew 18% to 1.23 million worldwide last year, but procedure growth was forecast to slow to a 13% to 16% rate in 2020. As the primary generator of revenue sources, a slowdown in procedure growth would imply sales will follow suit after the 22% surge that marked the end of 2019.  

It isn't the only way daVinci can make money, though, as new instruments to support new kinds of surgeries and training and support services should also provide a boost. After the post-report pullback, Intuitive's stock trades for 44.5 times adjusted earnings -- the cheapest it's been in a few years. Based on average analysts' expected profits in 2020, the stock trades for an earnings multiple of 36.8, implying the general view that profits will keep expanding at a double-digit pace.  

That is nonetheless a hefty premium for this healthcare stock, but such is the case for high-quality companies taking the lead in advancing technology. Besides, this is still a high-growth enterprise worth holding for the long haul, especially as healthcare starts to feel the effects of the cloud, connectivity, and big data forces that have been at work in other industries in the past decade. Put another way, investors might be expressing a little displeasure with the immediate-term outlook, but there is plenty to like with Intuitive Surgical. The recent pullback looks like an opportunity to start or add to positions in the robotic surgery leader.