Shareholders of Intuitive Surgical (ISRG 2.62%) have had a lot to cheer about during the past year. After the company sifted its way through the onset of the Affordable Care Act and the concurrent tightening of hospital budgets, dealing with questions about efficacy in key procedures, and marketing a brand new surgical robot, its shares have recovered nicely.
Since May of 2014, shares have surged more than 75%. But with that has come a much pricier stock. Currently, Intuitive Surgical trades for 32 times trailing earnings and 34 times free cash flow (FCF). In order to keep pace with heady expectations, here are the three metrics that I -- as an Intuitive shareholder -- will be watching.
Procedure growth -- particularly general surgery
As far as long-term Foolish investors are concerned, there isn't any metric more important than procedure growth. My thesis behind investing in Intuitive is that as doctors tinker with the daVinci robot during the years and decades, they will find many different ways to use the machine to improve patient outcomes and cost efficiencies.
During the past two years, that has been the case. What was once a company that relied almost uniformly on hysterectomy and prostatectomy procedures is now one that is becoming far more diverse. While those two procedures are still important, the chart below shows how general surgery has been the place where new procedures have been coming from.
During the company's last conference call, CEO Dr. Gary Guthart specifically called out two procedures that the company will be focusing on: thoracic surgery and hernia repair. I will be listening in to the conference call to see what type of color management offers surrounding these two procedures. To put things in context, management has said that it expects procedure growth to clock in at 9% to 12% growth for the year.
Europe and Asia
Procedure growth is one of the two factors that investors have focused on as a key to the success of this growth stock. The other is geographical growth. Traditionally, Intuitive has generated the bulk of its revenue stateside. But that's starting to change.
For instance, during 2015, procedure growth outside of the U.S. was actually up 26% -- far surpassing domestic growth. Management specifically said that, in the year ahead, growth in Asia -- primarily Japan, China, and South Korea -- was a top priority. Patrick Clingan, Intuitive's Director of Finance, said that a reimbursement decision by Japan's governing medical body, combined with the potential approval for the placement of more Intuitive robots in China, will be key for helping the company to meet demand in 2016.
During 2015, procedures in Europe were generally flat, but investors are hoping that the spate of new procedures stateside -- particularly in hernia repair and thoracic surgery -- combined with the potential for more urological procedures can reignite growth in the region.
Average selling price (ASP)
When Intuitive introduces a new machine -- as it did with the Xi system -- several factors combine to push down margins on system sales. For one, the company isn't able to realize the benefits of immediate scaling because hospitals take a wait-and-see approach. Therefore, overhead costs associated with manufacturing necessarily eat up more of the revenue brought in.
Furthermore, the company usually offers trade-ins and lower price points to get the Xi in hospitals' hands to let them see what the new machines can do. While this is a good move in the long run, the Xi has now been on the market long enough -- almost two years -- that such discounting shouldn't be taking place anymore. As you can see below, ASPs have been creeping up lately, and if they stay that way -- or go up -- it's a good sign that the company still has the pricing power to increase margins.
Investors should remember that this stock has once again become a highflier. If the company fails to meet quarterly expectations, shares could be significantly affected.
What's important is that the longer arc of procedure growth remains intact. In the end, that's what the company needs in order to be a long-term force in the medical community -- and your portfolio.