Between going public in 2005 and early 2013, Intuitive Surgical (NASDAQ:ISRG)-- the maker of the daVinci robotic surgical system -- could do no wrong. Shares rose 1,340% during that time frame, as more and more hospitals used the company's systems for urological and prostate operations.
But the last two years have been forgettable ones for shareholders of the company. First, professionals in the medical community started publicly questioning the efficacy of daVinci-run hysterectomies -- previously one of the most popular operations for the machine. Then, the onset of the Affordable Care Act nudged hospitals into a far more conservative stance when it came to capital spending.
Add those together and you get a stock that fell 40% over the course of just 15 months. But with the company's latest earnings release, it's clear that Intuitive Surgical has gotten its footing back. Here are the two biggest reasons why.
System sales have recovered
For years, Intuitive was able to grow its installed base of machines by impressive numbers. That's important not only because the company gets revenue from such sales, but with each new installed system, Intuitive benefits from the razors-and-blades model with instrument revenue.
However, as mentioned above, the onset of the Affordable Care Act caused a significant slowdown in system sales. That now seems to be changing.
Whether its because hospitals are feeling more confident about what their budgets will look like now, or that the new Xi system holds more promise for surgeons, system sales have stabilized over the last three quarters.
A new procedure in the spotlight
For much of the past two years, Intuitive bears have argued that if surgeons no longer believe the robot helps with hysterectomy procedures, then it is doomed to be used less and less. I, however, found that argument to be very shortsighted.
Instead, I believed that doctors would continue experimenting with the daVinci for general surgical procedures, and that this experimentation would lead to better outcomes for patients and Intuitive shareholders.
So far, this thesis is playing out well. While overall surgical procedures grew 10% worldwide, growth in "General Surgery" procedures in the U.S. clocked in at 33%-- an impressive feat. CEO Gary Guthart said that this came from, "strong growth in da Vinci colorectal surgery, hernia repair and in other general surgery procedures ."
The hernia procedures, especially, show a lot of promise. Last year, management spent an outsized portion of the conference calls highlighting the potential of daVinci to improve outcomes in hernia repair.
This time around, management continued the trend of positive feedback. "Looking more deeply at hernia repair, we are encouraged by robust procedure growth coupled with positive feedback about the clinical outcomes being generated with da Vinci surgery during these early stages of adoption ," said Director of Finance Patrick Clingan.
While the company's stock trades at an expensive 32 times earnings today, investors can take some solace in the fact that Intuitive has stabilized its system sales and appears to have another huge procedure available where the daVinci can significantly improve patient outcomes.