Earnings season is well on its way. And as always, some companies will report disappointing financial results and see their shares plummet. Others have already had the opposite experience: solid earnings reports that sent their shares soaring.
Two such companies are DexCom (DXCM 1.89%) and Intuitive Surgical (ISRG 2.21%). These two medical device specialists jumped following their latest quarterly updates, capping off an impressive recent run of form. But can they maintain that momentum?
1. DexCom
DexCom focuses on helping diabetes patients with its innovative continuous glucose monitoring (CGM) systems, which allow them to effortlessly keep track of their blood glucose levels throughout the day. DexCom's key device is the G6, from which it currently makes most of its revenue. And with the increased uptake in CGM technology, the company's financial results remain strong.
The company reported its third-quarter earnings on Oct. 27. Revenue increased by 18% year over year to $769.6 million, while the company's adjusted net earnings per share (EPS) came in at $0.28, higher than the $0.22 reported during the year-ago period. DexCom's results were well-received by Wall Street, but there is something else to be excited about too.
DexCom earned clearance for its next-gen device, the G7, in Europe earlier this year. The company has started launching this new CGM system in several countries there. CGM technology is already associated with better health outcomes for diabetes patients.
But the G7 proved even more so than the G6 in clinical trials. The former has yet to earn the green light in the U.S., but DexCom expects that to happen before the end of the year.
With a brand-new device under its belt, DexCom should continue to make solid headway in the vast diabetes space. The company estimates that even the U.S. market remains severely underpenetrated. Further, recent developments in the country could meaningfully increase the company's opportunities in the country. The U.S. Centers for Medicare and Medicaid Service (CMS) recently released a new proposed plan that would expand coverage for CGM devices.
Currently, only those on insulin therapy who take at least three doses per day are covered. The proposed plan would broaden the pool of eligible patients to include, for instance, those who have a history of hypoglycemia (low blood glucose levels), regardless of whether they are on insulin therapy. The CMS still needs to finalize this decision, but per the historical record, there is an excellent chance this proposal will find its way into the final plan. More people covered by third-party payers should help further increase CGM adoption.
In short, there is plenty more room to grow in the U.S. market, and the same is true abroad. With an uncertain near-term economic outlook, this may or may not be the beginning of a new period of market-beating returns. However, DexCom's shares are worth holding on to in these challenging times, especially for investors focused on the long game.
2. Intuitive Surgical
Intuitive Surgical is a leader in robotic-assisted surgery (RAS) thanks to its device, the da Vinci System. The company has been struggling over the past couple of years due to a decrease in procedure volume, a consequence of the pandemic. A rebound could be in the cards for Intuitive Surgical as the pandemic subsides. And despite the headwinds, it is recording decent financial results.
In the third quarter, the company's revenue increased by 11% year over year to $1.56 billion. Intuitive Surgical's adjusted EPS remained flat year over year at $1.19, beating analyst estimates. The company's procedures also grew by 20% year over year during the period. Further, its installed base of da Vinci systems reached 7,364 as of the end of the period, 13% higher than the year-ago quarter.
In other good news for investors, Intuitive Surgical recently announced that it would repurchase $1 billion worth of its own shares. Stock buybacks may signal management's confidence in the company. In my view, that's justified, as Intuitive Surgical still has plenty of opportunities ahead despite its stock lagging the market over the past year.
Consider Intuitive Surgical's installed base. As that number continues to grow, the company will increasingly make money by selling instruments and accessories that accompany the da Vinci system and that physicians use in various procedures. In other words, a large installed base of Intuitive Surgical's crown jewel creates a steady income stream for the company.
Could healthcare facilities get rid of the da Vinci system and buy a competing device? In theory, yes. But here too, Intuitive Surgical has a couple of advantages. First, there aren't that many healthcare companies that are direct competitors. That's why Intuitive Surgical held a nearly 80% share of the RAS market in 2020.
Second, switching isn't simple. It takes hundreds of thousands of dollars to buy a new machine and invest the time necessary to train medical personnel in the new device. These high switching costs ensure that Intuitive Surgical will keep most of its clients. Some estimates project that the RAS market will expand at a compound annual rate of 19.3% through 2030.
It likely won't stop there since the minimally invasive procedures using RAS devices help patients achieve better outcomes and a faster recovery. With this massive opportunity ahead, investors should follow the lead of Intuitive Surgical's buyback program and purchase the company's shares too.
