"Cut." That appears to be the operative word for Intuitive Surgical (NASDAQ:ISRG) so far this week. The leading maker of robotic surgical systems cut its sales estimates. Analysts cut their price targets. And Mr. Market promptly cut the price of Intuitive shares by nearly 17% in trading Tuesday.
Out come the knives
The first knife came out on Monday when Intuitive Surgical gave a sneak preview of its second quarter financial results. Revenue for the quarter is now expected to come in at around $575 million. While that amount is 7% higher than revenue from the same quarter last year, analysts expected a lot more -- the average analysts' estimate was close to $630 million.
While sales of instruments and accessories are expected to jump by 18% year-over-year in the second quarter, Intuitive says that it will likely report a 6% drop in sales for its da Vinci surgical systems. The company projects earnings for the quarter of around $160 million, up 3% from the $155 million reported in the second quarter of 2012.
Other knives were quick to follow. Canaccord Genuity slashed its price target for Intuitive from $527 to $444 per share and downgraded the stock from "buy" to "hold." Lazard Capital kept a "buy" rating on Intuitive, but cut its price target to $480 from $625. JMP Securities downgraded the stock to a "market perform" rating. Goldman Sachs lowered Intuitive Surgical from a "buy" rating to "neutral."
How deep of a cut?
The downgrades and stock drop make sense. After all, Intuitive Surgical has been a growth play. When growth stocks don't show solid sales and earnings growth, bad things happen. The big question now is whether the company can return to its rapid growth of the past.
A couple of reasons were given by Intuitive for the disappointing da Vinci sales. The company attributed the decline to "increased economic pressure on hospitals" and to "moderating growth" in benign gynecologic procedures.
If we focus primarily on the hospital issue, things should eventually pick up for Intuitive. The company says that financial issues are causing the hospitals to defer purchases. Deferring isn't as bad as canceling. If Obamacare delivers on its promise to reduce the number of uninsured patients, hospitals could move past some of their issues and be able to buy again.
However, the slowing growth in gynecologic procedures is troubling. Last year, gynecologic procedures served as the driver for overall da Vinci procedure growth.
Intuitive said that the recent moderation in growth stems in part from "a trend by payers toward encouraging conservative management and treatment in outpatient settings." My translation of this is that insurers are pushing health care providers and patients away from using robotic surgery. That doesn't bode well for Intuitive.
The landscape appears to be shifting somewhat. Intuitive won't be able to return to its fast-growing ways of the past if insurers are working against the company's products.
However, I'm not a doomsayer. The sky isn't falling for Intuitive Surgical. More procedures continue to be performed using da Vinci despite the slowdown. Recurring revenue from instruments, accessories, and services accounts for 57% of total revenue. That's not a bad business model.
I also suspect that the current plunge in shares is a bit overdone. A cut in the stock price was warranted -- but not a cut to the bone.