While it's easy to get wrapped up in other healthcare areas that seem more exciting, such as biotech or pharmaceuticals, there are a number of other companies in quieter sectors that are worth a mention. In particular, there are a number of medical device manufacturers that investors should check out.
Both Intuitive Surgical (NASDAQ:ISRG) and Medtronic (NYSE:MDT) are companies that have a lot going for them. While the two businesses once had little overlap with each other, they are now on track to become direct competitors in the area of surgical robotics. Taking this into consideration, if you had to pick between the two, which one is the better buy?
Understanding Intuitive Surgical
Intuitive Surgical's systems started off as a way to help surgeons operate on wounded soldiers remotely. While things didn't work out as originally expected, the idea of using robotic surgical systems has quickly caught on with hospitals around the world.
For surgeons, it's understandable why using a robotic system is appealing, although there's technically nothing "robotic" about these systems. Surgeons take control of a machine via a nearby console, which allows them to operate on a patient without having to personally hold the scalpel or other medical instruments. These robotic surgery systems are capable of making extremely precise movements without the risk of making an involuntary mistake. A robotic arm will never tire, flinch, or twitch, preventing accidents that could potentially cause complications or even cost a patient's life on the operating table.
Intuitive Surgical sells its own surgery system (the da Vinci system), sells replacement parts and accessories, and provides the training required by doctors. That means the company will always have a stream of recurring revenue that continues to grow as its market share increases.
So far, Intuitive Surgical has installed more than 5,500 da Vinci machines around the world, and that figure is growing at a rapid rate. Despite the benefits of robotic-assisted surgery, most operations are still done normally by a surgeon, although this trend is rapidly changing. According to one study, the percentage of surgeries using robotic assistance in the U.S. has skyrocketed from 1.8% in 2012 to 15.1% in 2018. For companies like Intuitive Surgical, this means that the robotic surgery market is expanding extremely quickly but still has plenty of room to grow.
Looking at Medtronic
Medtronic has a much broader scope than Intuitive Surgical. The company is one of the largest medical device manufacturers in the world, offering products for a number of different medical areas. Among its largest business segments is its cardiac and vascular group, which includes pacemakers, artificial heart valves, stents, and other products.
Other segments include Medtronic's minimally invasive therapies group, which includes products such as ventilators, sealing instruments, and various medical monitoring systems. There is also a restorative therapy segment and a diabetes segment, although the latter is relatively small in comparison with all the others.
Perhaps most interestingly for this comparison, however, is that Medtronic has announced plans to move into the robotic surgical system market as well. This would make the company a direct competitor with Intuitive Surgical, although wrestling market share away from the latter company would be a bit of challenge, considering it already has a first-mover advantage.
However, Medtronic isn't entirely a newcomer to the robotic surgical scene. In 2018, Medtronic bought out surgical robotics company Mazor Robotics for $1.7 billion. Mazor previously manufactured robot-assisted spine and brain surgery platforms. At the same time, Medtronic also has close relationships with some of the largest hospital chains and healthcare groups, both in the U.S. and internationally. Whether this will be enough for Medtronic to produce a competing product to Intuitive's da Vinci system is yet to be seen, but it's definitely something that Intuitive should be wary of in the future.
Intuitive's revenue has been growing rapidly thanks to expanding da Vinci system sales. Fourth-quarter revenue for 2019 came in at $1.28 billion, up 22% compared with the $1.05 billion reported back in Q4 2018. Installations of the da Vinci surgical system increased by 12%, growing from 4,986 installed systems last year to 5,582 as of the end of 2019.
Out of this total revenue figure, $671.2 million came from sales of accessories, while $416.2 million came from the actual sale of the surgery systems themselves. The remaining $190.3 million in revenue came from service sales, such as training and educational services. Net income came in at about $357.7 million for the quarter, which translates into an impressive 27.9% profit margin.
|Name||Market cap||Quarterly revenue||Revenue growth||Net income||Profit margin|
|Intuitive Surgical||$57.8 billion||$1.28 billion||12%||$357.7 million||27.9%|
|Medtronic||$120.9 billion||$8.1 billion||3.6%||$1.2 billion||14.8%|
Medtronic is growing at a slower pace. Q4 sales came in at $8.1 billion, up 3.6% from last year. The company's net income came in at about $1.2 billion, which works out to a 14.8% profit margin. Breaking it down by segment, the cardiac and vascular group brought in $3.1 billion in quarterly revenue, while the minimally invasive therapies and the restorative therapies segments brought in $2.3 billion and $2.2 billion, respectively. The diabetes group brought in just $626 million in comparison.
Which company is the better buy?
Both companies have their pros and cons. Intuitive Surgical is a much faster-growing business with an initial lead in a market that has tremendous growth potential. On the other hand, Medtronic is a diverse, well-established company with many different product types and plans to move into the robotic surgery system market soon. Medtronic also offers a 2.4% dividend, while Intuitive Surgical offers none.
Essentially it comes down to whether you prefer a growth stock or more of a blue-chip, dividend stock. While neither of these two companies are necessarily bad investments, the deciding factor between these two stocks will really be a matter of preference for most investors.
As for myself, I think Intuitive Surgical's business model is really attractive, and its growth potential seems stronger than what Medtronic can offer. And there are other dividend and value stocks that offer larger dividend yields than Medtronic, which is also something to consider.