Please ensure Javascript is enabled for purposes of website accessibility

5 Charts Show Why Someone Could Buy TransEnterix

By Todd Campbell - Feb 12, 2016 at 6:56AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's why this small cap robotics company could be the target of M&A.

Source: TransEnterix

Rumors are swirling that Johnson & Johnson (JNJ 1.13%), a major medtech company that's indicated it's hunting for deals, could acquire TransEnterix (ASXC -4.04%), a tiny company working on robotic surgery systems led by Todd Pope, former global president of Cordis, which was once a J&J division. Although no one knows if J&J (or anyone else) will offer to buy TransEnterix, and rumors are usually a sure-fire way for investors to run into trouble, here are five charts that show why TransEnterix' acquisition rumors may have merit.

No. 1: One major player
The market for robotic surgery platforms is dominated by one incumbent: Intuitive Surgical (ISRG 2.69%). Intuitive Surgical's Da Vinci system has disrupted the surgical market, especially in prostate procedures, but if TransEnterix can compete on price and features, there could be a big opportunity for this upstart.

Because TransEnterix won't have to elbow for market share against many competitors and its SurgiBot and ALF-X systems were designed to lower customer costs and overcome surgeons objections to robotic surgery, an acquirer with the right marketing team could put billions of dollars in Intuitive Surgical sales into play.

No 2: Profit potential
Of course, billions of dollars in market opportunity only matters if there's an opportunity for meaningful shareholder-friendly profit. After all, competing in a market that's big and growing, but unprofitable, is a fool's errand because the company with the deepest pocket is likely to win (Amazon is a great example).

Fortunately, as you can see in this next chart, the market for robotic surgical systems has proven to be very lucrative for Intuitive Surgical and that could mean that it will be similarly profitable for TransEnterix.

ISRG Operating Margin (TTM) Chart

ISRG Operating Margin (TTM) data by YCharts

No. 3: Market growth
TransEnterix could capture Intuitive Surgical's market share and Intuitive Surgical's profitability suggests that this is a bottom-line friendly business, but what could make this industry really compelling to an acquirer is its future growth trajectory.

Despite headway that's already been made by Intuitive Surgical, robotic surgery still only represents a single digit percentage of surgeries performed in the U.S. and EU and because of that, industry watchers think the surgical robotics market could soar from about $2 billion in 2014 to more than $10 billion in 2021. If so, that would work out to about 25% compounded annual growth!

No 4: Solid balance sheet and right valuation
Often, acquirers balk at buying if a company is on shaky financial ground or if investors have already bid the stock price up to untenable levels.

However, that doesn't appear to be the case for TransEnterix.

TransEnterix has about $53 million in cash on its books and it has less than $20 million in debt. The company's current ratio, which gives investors a quick and dirty look at a company's ability to make good on its short-term financial obligations, is a healthy 4.03.

Also, while shares have run up on rumors, the company's book value is $1.93 and that means its price-to-book ratio is 2.19. That's not ridiculously high for a company that's only now emerging, and it's less than half Intuitive Surgical's 4.54 price-to-book ratio.

TRXC Price to Book Value Chart

TRXC Price to Book Value data by YCharts

No. 5: Time is right
An acquirer has to be patient if it has to wait around for an acquisition to pay off. However, TransEnterix products should hit the market soon and that means that an acquirer's potential to capitalize on eventual sales and profit is coming up quickly.

TransEnterix will begin marketing its ALF-X multiport system in countries accepting the CE Mark of approval (Europe) this year and ALF-X may find willing buyers because its ability to reuse instruments could give it a per procedure cost advantage over Intuitive Surgical.

Additionally, TransEnterix hopes to land an FDA approval to begin marketing SurgiBot this year too. If approved, a $500,000 price that's 75% lower than the price of the Da Vinci system could allow TransEnterix to make inroads with small hospitals operating with tighter purse strings. According to TransEnterix, the vast majority of the thousands of small hospitals in the U.S. haven't yet embraced robotic surgery because of its cost.

Looking forward
Previously, Johnson & Johnson announced a deal with Verily (formerly Google Life Sciences) to create their own surgical robotic systems, so there's a chance J&J is happy to go on its own, rather than do a deal. Another acquirer for TransEnterix could emerge, but its probably best not to buy TransEnterix stock based on M&A hopes. Instead, investors willing to take the risk of TransEnterix failing should buy shares because TransEnterix could conceivably become a leader in what is a disruptive, growing, and profitable industry.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$179.52 (1.13%) $2.01
Intuitive Surgical, Inc. Stock Quote
Intuitive Surgical, Inc.
$206.10 (2.69%) $5.39
Asensus Surgical, Inc. Stock Quote
Asensus Surgical, Inc.
$0.38 (-4.04%) $0.02
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,174.75 (-0.21%) $-4.51, Inc. Stock Quote, Inc.
$109.56 (3.15%) $3.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.