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Better Buy: Intuitive Surgical vs. Johnson & Johnson

By Keith Speights – Updated Feb 24, 2020 at 9:29AM

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Which stock wins in a matchup between these healthcare juggernauts?

Intuitive Surgical (ISRG -1.74%) enjoyed a virtual monopoly in the robotic surgical systems market for quite a while. But Johnson & Johnson (JNJ -1.10%) has made several moves that could position it to be a formidable competitor to Intuitive. The most significant of those moves was J&J's acquisition of Auris Health last year, which was founded by Intuitive Surgical founder Fred Moll.

It's not even a close contest between Intuitive Surgical and J&J when it comes to recent stock performance. Intuitive has eaten Johnson & Johnson's lunch. But which stock is the better pick looking ahead?

Surgical robot with lights in background

Image source: Getty Images.

The case for Intuitive Surgical

Why buy Intuitive Surgical? For starters, the company continues to deliver strong revenue and earnings growth. In Q4, Intuitive's revenue and earnings jumped 22% year over year. That's impressive for a company with market cap of around $70 billion.

What's even more impressive is Intuitive Surgical's recurring revenue. The company makes a lot more money from sales of replacement instruments, accessories, and services than it does from selling robotic surgical systems. In 2019, a whopping 72% of Intuitive's total revenue was generated from recurring sources. This percentage will almost certainly continue to grow as customers use the company's da Vinci systems for more procedures and as more customers lease robotic surgical systems rather than purchase them.

Procedure volumes using da Vinci increased 18% year over year in 2019. These volumes should grow even more thanks to a larger install base and demographic trends that should drive higher demand for the procedures for which robotic surgery is best suited. In addition, Intuitive continues to introduce new innovations that enable even more types of procedures to be performing using robotic assistance.

But what about the potential threat from J&J and other rivals such as Medtronic, which plans to launch its own surgical robot that will compete directly against da Vinci? I think that more entrants will actually help Intuitive over the long run by expanding the market. In the short term, my view is that Intuitive's huge head start and extensive track record will allow it to fend off competition.

I'm also upbeat about Intuitive Surgical's opportunities to expand outside of its robotic surgical systems niche. For example, the company recently announced its acquisition of Orpheus Medical, which provides clinical and imaging documentation solutions. This move into hospital informatics could be just the beginning of more moves by Intuitive to establish beachheads in adjacent markets.

The case for Johnson & Johnson

Johnson & Johnson is already competing in plenty of different markets. In fact, its diversification across healthcare is one of the top things that make J&J an attractive stock. J&J operates hundreds of businesses across the world that serve nearly every healthcare market you can think of.

The company's biggest moneymaker is its pharmaceutical segment, which contributes over half of J&J's total revenue. This segment also generates the highest level of growth for Johnson & Johnson, thanks to blockbuster products including cancer drugs Darzalex and Imbruvica and immunology drugs Stelara and Tremfya.

J&J's medical device segment is also a multibillion-dollar business, kicking in over 30% of total revenue. This unit develops and markets a wide range of products, including diabetes-care devices, surgical instruments and systems, orthopedic products, and contact lenses.

The consumer health segment generates around 17% of J&J's total revenue. Its products include well-known brands such as Band-Aid, Johnson & Johnson Baby Powder, Listerine, Motrin, and Tylenol.

J&J's moat appears to be eroding somewhat. Sales for its former top-selling drug, Remicade, have plunged in the face of biosimilar competition. The company is embroiled in lawsuits related to its opioid drugs and its talc-based products. J&J's brands have even slipped in global rankings. However, the company has promising new drugs in its pipeline and plenty of financial flexibility to make key acquisitions to boost growth in the future.

In addition, Johnson & Johnson ranks as one of the premier dividend stocks on the market. Its dividend yields over 2.5%. J&J has increased its dividend for an impressive 57 consecutive years.

Better buy

My view is that income-seeing investors won't go wrong buy Johnson & Johnson stock. Despite facing some challenges, J&J is solid overall. However, if I could only pick one of these stocks, it would be Intuitive Surgical.

I think that Intuitive's business model is hard to beat. The company's recurring revenue continues to grow. Intuitive's moat appears to be strong. Demographic trends and continued innovation should expand the market potential for robotic surgical systems. I like Johnson & Johnson, but I like Intuitive Surgical even better.

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

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$164.53 (-1.10%) $-1.83
Intuitive Surgical, Inc. Stock Quote
Intuitive Surgical, Inc.
$189.06 (-1.74%) $-3.34
Medtronic plc Stock Quote
Medtronic plc
$82.27 (-0.39%) $0.32

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

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