At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Goldman's gut check
It's been nearly three months since Goldman Sachs started covering Intuitive Surgical (Nasdaq: ISRG), slapping the stock with a sell rating. So far the analyst has been right on the money; selling for $305 a share the day before Goldman cast its baleful eye upon it, Intuitive has sunk steadily ever since. But sometimes it seems Goldman is of two minds about the robotic surgery specialist.
Take last week, for example. With Intuitive sitting near a 52-week low at $260 a stub, out came Goldman with what sounded, for all the world, like a bullish pronouncement: Tweaking its estimates of Intuitive's prospects, Goldman declared the company would in all likelihood earn:
- $8.76 per share this year (about what it had previously predicted)
- $9.92 in fiscal 2011 (almost a 1% above the earlier estimate)
- $11.66 in 2012 (a 2% bump)
- $13.42 in fiscal 2013 (up 3%), and
- $15.08 in fiscal 2014 (fully 5% higher).
So that's an upgrade, right?
Better earnings? Great news! Surely this trend of accelerating earnings growth, culminating in 2014 earnings fully 72% better than what it earned in 2010, would inspire Goldman to remove its "sell" rating on the stock ... but no. In fact, the opposite happened.
Despite the fact that Intuitive was already trading below the price target Goldman had set in September ($270), and despite the fact that Goldman's revised estimates showed the company to be more profitable than Goldman had believed at the time it initiated its "sell" recommendation, the analyst did not upgrade the stock. Instead, Goldman held Intuitive at "sell." And since it doesn't make much sense, telling people to sell a stock that costs $260 when you say it's worth $270, Goldman furthermore reduced its target price -- all the way down to $220 a share.
Gee! Goldman must really hate this stock, huh?
Sure sounds like it. Of course, attempting to justify its renewed pessimism on the shares, Goldman argued last week that even though it was upping earnings estimates on the stock, the changes were not "material." Moreover, in this week's price target reduction, Goldman noted that "channel checks" suggest Intuitive's sales are suffering from the global recession.
This seems to have reinforced Goldman's view that there's a "flight to safety" afoot in the market today, and that risky growth investments such as Intuitive are to be avoided. Still, the animus against Intuitive does seem overblown, considering how Goldman has been treating the other medical devices stocks it covers this week. So far, Goldman has:
- pulled its bet on CareFusion (NYSE: CFN), suggesting Baxter (NYSE: BAX) is a stronger competitor than initially thought;
- but doubled down on C.R. Bard (NYSE: BCR), raising its price-target on the buy-rated shares of this "commodity" medical devices play;
- and left both ratings and price targets unchanged on other companies it arguably "dislikes" -- Becton and Zimmer Holdings, both rated neutral, and Varian Medical (NYSE: VAR), rated a sell.
And yet, might Goldman have a reason for singling out Intuitive for punishment? Perhaps. Basically, whether you follow the analyst's advice on this one, and sell Intuitive, depends on whether you're willing to take a leap of faith and decide that Goldman is right on this one -- and everyone else on Wall Street is wrong.
"We've analyzed their attack, sir, and there is a danger"
You see, right now Intuitive Surgical is selling for about 24.4 times free cash flow (and carries nearly $1 billion on its balance sheet, reducing the true cost of the shares accordingly.) That's not an unreasonable price if you assume Wall Street consensus estimates of 26% long-term growth for the company are correct. On the other hand, Goldman's estimates -- even the revised, higher-earnings guesses it published this week -- tell us that it believes Intuitive will only achieve 14.5% annual growth -- roughly half the consensus pace. While that's faster growth than most folks expect to see out of peer medical devices makers General Electric (NYSE: GE) or Medtronic (NYSE: MDT), for example, it's far lower than the consensus for Intuitive in particular, and right in line with expectations for the medical devices industry as a whole.
So really, it all comes down to this: If "everyone else" is right about Intuitive Surgical's growth rate, and Goldman is wrong, then the shares look undervalued to me -- giving new investors perhaps 20% upside. But on the other hand, if Goldman is right, Intuitive is overvalued -- I'd even go so far to say "vastly overvalued." If all Intuitive can manage is 14.5% growth, I could see the shares falling as far as $180.
Foolish final thought
So who's right? Personally, I'm convinced Intuitive Surgical is much better than the average medical devices maker, and will accordingly grow much faster. But that's just me. As for you ... you pays you money, you takes your chances.
Which way will you bet? Tell us below.
