Shares of Intuitive Surgical (ISRG -0.55%) fell just after the company put the bandages on a difficult but overall successful 2022. As of this writing, the stock is now down by 8% over the last 12 months, in line with the performance of the S&P 500. The reason for its recent dip? Management's lackluster outlook for 2023, which calls for moderate growth but rising expenses.
If it were any other healthcare company, the market might be highly displeased -- but this is robotic surgery pioneer Intuitive Surgical we're talking about. It's a wonderful business, and it is making investments today that could eventually lead to an acceleration in profitable expansion. Does that make Intuitive stock a top healthcare buy to kick off 2023?
Typical cautious outlook, but elevated expenses are coming
Intuitive Surgical's revenues rose 9% in 2022 to $6.22 billion, and 79% of that revenue was recurring in nature -- primarily from sales of instruments and accessories for its Da Vinci robotic surgical systems, software, and services, and lease payments on the robots. That bodes well for Intuitive's ability to keep expanding at a consistent pace.
Data source: Intuitive Surgical. Chart by author.
That being said, earnings per share (EPS) fell 22% in 2022 to $3.65. On an adjusted basis, EPS fell 5% to $4.68. The strong U.S. dollar took a bite out of revenue growth and profit margins -- as it did for all U.S.-based multinationals -- but Intuitive has also been making investments into its business to spur future growth.
I've been expecting that these investments would eventually begin to pay off and that spending would ease, in part warranting the premium valuation on Intuitive's stock. Shares currently trade for 67 times trailing 12-month earnings, and 52 times trailing adjusted earnings. But elevated spending could be a bit sticky. Meanwhile, its outlook for procedure growth is to be in the 12% to 16% range in 2023 -- and that's the primary driver of Intuitive's revenue growth, offset by declining Da Vinci robot sales as an increasing number of hospitals and surgery centers opt for a leased unit instead. Between those two issues, I no longer believe we'll see a big uptick in earnings and free cash flow in the coming year.
Where's all the cash going?
Specifically, Intuitive management said its capital expenditures (property and equipment) will increase to a range of $800 million to $1 billion in 2023, compared to just $532 million in 2022. Where's all that cash going?
About two-thirds of capital expenses in the coming year will go toward expanding Intuitive's supply chains and manufacturing capacity. Investments include a boost to facilities in California (where it makes the Ion machine) and Georgia (where it produces the flagship Da Vinci system), as well as localized production facilities in Germany and China and a low-cost endoscope manufacturing plant in Bulgaria. Intuitive has also been investing in ownership of its technology pipeline, like its imaging software capabilities, for example.
Additionally, there will be an increase in clinical trial expenses in 2023. (Those are mostly not capital expenses, but they'll be additional expenses nonetheless.) Intuitive says it's dealing with longer lead times in terms of getting approval from regulators to bring new robotic systems and procedures to market. No new multiport system launches are expected in 2023, although the Ion machine is expected to receive clearance in Europe.
In other words, Intuitive likely won't see a dramatic lift in its profit margins in the next year or two amid its increased level of spending.
Is the stock a buy?
Intuitive Surgical has been a wonderful long-term investment, and I personally have no plans to sell my shares. There is still tremendous potential for this business as all those investments eventually begin to pay off.
But is Intuitive Surgical one of the best healthcare stocks to buy right now? Given its premium valuation and tempered guidance for 2023, I don't think so. I believe some patience is warranted at this juncture.
