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." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
JPMorgan: an Intuitive analyst
My, what a difference a week makes. One week ago, we watched in wonder as JPMorgan Chase came out and recommended buying shares of Intuitive Surgical (NASDAQ:ISRG) ahead of the company's earnings release. This would have been a gutsy call, coming just hours before earnings. But JP then went on to explain that the timing of its recommendation was entirely coincidental. It didn't matter what happened at Intuitive when it reported earnings. What really mattered to JP was what great business Intuitive was going to do over the next couple years.
(Hey! Hedge your bets much, JP?)
As it turned out, though, JP didn't need to work so hard explaining away the risk of an earnings miss. As it turned out, Intuitive Surgical did just fine. After stumbling initially in post-earnings, after-hours trading, the stock came roaring back to end the week up nearly 9%. Now, a second analyst has declared this is only the beginning of the good news for Intuitive Surgical.
Better late than never, B of A
Upgrading the stock post-earnings (and after the risk of a miss was out of the way), Bank of America may have missed the chance to catch a quick bounce on the stock. But on the plus side, the banker gave itself a couple extra days to carefully mull the numbers, and make a more informed decision in recommending the stock.
So ... why is it exactly that Bank of America thinks Intuitive is worth buying, even after the run-up? Basically, for the same reasons that JPMorgan urged buying it several days earlier: because Intuitive's da Vinci surgical robots are steadily gaining share in the "market" for U.S. surgeries, and because B of A thinks the company will keep on doing so. And even if the stock's price tag is a bit more expensive now, at $530 and change, than it was before earnings -- it's still not a patch on the $620 or so that Intuitive could be worth a year from now. But is B of A right? Is JPMorgan right, too?
Bad news all over
So far this earnings season, news for medical equipment stocks like Intuitive has been mostly downbeat. St. Jude Medical (NYSE:STJ) and Abbott Labs (NYSE:ABT) both reported "light" sales quarters last week. Even General Electric (NYSE:GE), mighty GE, admitted that sales in its health-care division dropped 1% year over year, reversing a trend of positive sales growth seen earlier in the year .
And across the industry, the story's the same. In fact, UnitedHealth Group (NYSE:UNH) -- a sort of "anti-proxy" for the medical equipment industry, because it pays for the goods it's selling when customers make health insurance claims -- noted that "the share of customer premiums spent on health care dropped" last quarter. They dropped enough, in fact, to help give UnitedHealth confidence in boosting its own guidance for full-year 2012 profits .
Foolish final thought
Granted, even in a slow sales environment generally, it's possible for Intuitive Surgical in particular to expand its sales and profits by creating new markets and expanding the share of surgical procedures performed by its robots -- just like Bank of America says. That said, and taking nothing away from the brilliant performance Intuitive turned in last week, I have to say I remain skeptical about the stock and the price investors are paying for it. And yes, the price Bank of America says you should pay, too.
Why? Quite simply, because if Intuitive looked expensive last week at 28 times free cash flow and a 20% long-term growth rate (as it did), then the stock looks even more expensive today at 29 times free cash and 18% growth.
I've said it before and I'll say it again: Great company. Lousy stock price.
Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, General Electric, Intuitive Surgical, JPMorgan Chase, and St. Jude Medical. Motley Fool newsletter services recommend Intuitive Surgical and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.