Yesterday after the market close, Intuitive Surgical, (ISRG 3.39%) reported earnings that absolutely crushed expectations.
Naturally, investors in the robotic-surgery specialist were rewarded with a 6% drop this morning. So, what happened?
Here's what they said
Let's check out the numbers first.
Quarterly revenue decreased 5% year over year to $576 million -- a result driven by a 6% increase in instruments and accessories revenue to $268 million, but offset by the sale of "just" 138 da Vinci Surgical Systems for $205 million, or a 23% drop. But that still easily exceeded analysts' consensus estimates, which called for total sales of $548.56 million.
Meanwhile, thanks largely to Intuitive Surgical's share repurchase efforts, fourth quarter net income per share actually rose slightly to $4.28, compared to estimates for earnings of just $3.76 per share.
Here's what they didn't say
So, why the drop?
First, keep in mind shares of Intuitive Surgical spiked by as much as 14% after the company preannounced those revenue figures early last week. As of this writing, the stock is still 5.4% higher than it stood the day before that announcement.
Second, and perhaps more importantly, Intuitive Surgical has chosen not to provide forward guidance for now. CEO Gary Guthart explained, "The combination of gynecology trends, the [Affordable Care Act] implementation in the United States, and uncertainty of future capital purchases in Japan creates difficulty in revenue forecast for at least the first half of 2014."
But while Mr. Market understandably hates this kind of uncertainty, I have to applaud Intuitive Surgical's prudence.
After all, there's little sense in taking a shot in the dark given the recent unprecedented changes in the health-care industry. And a bad prediction could not only destroy management's rapport with investors -- something MAKO Surgical shareholders in 2012 remember all too well -- but also add to their already troublesome legal matters with inevitable shareholder lawsuits if said guidance was far enough off base.
Here's the plan for 2014
Intuitive Surgical will obviously continue to support global growth in its core gynecology and urology procedures, but its eyes are also set on grabbing a larger chunk of the fast-growing general-surgery market -- notably with both colorectal and single-incision procedures -- which grew 93% over the last year alone.
In fact, according to Guthart, general surgery overtook urology as the second largest category of da Vinci use in the United States last quarter.
Outside the U.S., Intuitive will look to maintain strong sales momentum in Europe, which played a huge role in 2013 helping international procedures and systems sales grow 21% and 59%, respectively. And though Japan also helped drive those numbers upward last year, management asserted capital sales there will remain unpredictable until 2016, when potentially favorable revisions in Japan's national health care coverage are slated to kick in.
Foolish takeaway
For now, investors are left with a stock that still doesn't look particularly cheap trading around 25 times last year's earnings. But when you back out Intuitive Surgical's enviable $2.8 billion cash pile -- which grew by another $222 million last quarter, by the way -- its trailing P/E ratio falls to 20.
That may not seem extraordinarily cheap, but I think it's a well-deserved premium considering we're still talking about a solidly profitable business that enjoys a massive head start in a cutting-edge industry. In the end, that's why I'm convinced today's pullback represents a fantastic buying opportunity for patient, long-term investors.
