Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.
But the market is at record highs these days, and, according to a recent report by The Wall Street Journal, February was a record month for stock buybacks with companies authorizing the repurchase of $177.8 billion worth of stock. The bearish read on that is they're doing the opposite of "buy low, sell high." Worse, they're simply buying stock and not investing in their businesses, hiring new employees, or making acquisitions suggesting that despite having war chests filled to overflowing they don't see the economy as good enough to take a risk on.
So don't use the buyback announcement as a reason to buy the stock yourself -- rather, use it as a launching pad for additional research.
Returning value
Just yesterday, Intuitive Surgical (ISRG 0.81%) announced a massive new $1 billion share purchase program on top of the $208 million that remains on its current buyback plan, equating to about 2 million shares at yesterday's closing price, or around 5% of its float. It plans to fund the repurchase program through cash and investments, and as of the end of 2012, the company had approximately $2.9 billion of cash, equivalents, and investments.
The stock has fallen about 20% in the past few weeks as concerns over a spike in device malfunction reports weighs heavily on its shares.
Mona Lisa's smile
The selloff began after it was reported the FDA was looking into whether Intuitive's da Vinci surgical robotics machines were causing complications for surgeons. Some 450,000 procedures were performed with the systems in 2012, up 25% from the year before, and the question being asked is whether the high cost of the equipment -- they run about $1.5 million each -- is worth the minimally invasive surgery they perform. The Journal of the American Medical Association charged the systems raised the cost of a hysterectomy, for example, but did little to improve safety. Gynecological surgery comprises 60% of the procedures performed in the U.S., and a hysterectomy is the most common operation using the devices.
Intuitive Surgical realized almost $2.2 billion in sales last year, of which $1.8 billion came from product sales generating $1.3 billion in gross profit.
The robotics maker did nothing to help itself when it tried to explain that the spike in problems reported with the da Vinci systems was because it changed how it reported them to the regulatory agency.
It began the new system last September and immediately began seeing a rise in the number of issues doctors were having, with a cable breaking being the most common problem reported, but rendering the machine non-functionable. Intuitive's stock fell again when it issued the rationale.
The human element
The Fool's Brenton Flynn believes although questions are being raised about the daVinci's efficacy, he says a lot of the problems stem from "operator error." When it comes to surgery, until the rise of SkyNet allows the robots to perform the operations themselves, we're going to need actual surgeons operating the equipment and that's going to introduce an element of risk.
Yet where Brenton sees that as something positive for Intuitive Surgical since it's just the manufacturer, I'm not so certain it won't face culpability since the health care professionals have to rely upon the device maker to instruct them appropriately on its usage. One of the charges being leveled against Intuitive is that its marketing is getting in the way of training.
Whether it's lack of training or a system malfunction, it poses problems for the medical device maker. Last year, MAKO Surgical (MAKO +0.00%) had to recall a number of its RIO Systems because of software glitches and saw its stock stumble, while Johnson & Johnson (JNJ 0.54%) and Stryker (SYK 2.98%) face legal liabilities for device recalls they effected.
A fair value
Despite a somewhat depressed stock price, Intuitive Surgical may see its shares fall further yet as it faces a raft of lawsuits over its devices. It could be the medical device maker is preparing itself to move in and scoop up a discounted stock with a lot of dry powder ready to fire.
Investors who find Intuitive Surgical stock weakened on news of such developments just might want to avail themselves of the resulting opportunity to acquire shares when offered and benefit as the medical device maker buys back its stock.
