Thankfully -- very thankfully -- surgery has come a long way since the advent of the great-great-great-great-great (and so forth) granddaddy of all surgical techniques, trepanation. That's the ancient practice of drilling a hole in the skull to cure certain maladies (although some alternative medicine proponents -- or whatever term you'd use to describe them -- still condone it now).
Despite such unpleasant beginnings, centuries of progress in human knowledge, science, and technology have brought innovations that have made medicine -- especially the invasive procedure known as surgery -- a far less risky and painful procedure, which not only improves quality of life but saves lives to boot.
However, there's still room for improvement; anything that makes surgery less invasive, less painful, and less psychologically upsetting is a great idea. I feel pretty safe in assuming that none of us relishes the idea of going "under the knife" (a vulgar term, maybe, but one that seems to really describe the way most of us feel about surgery).
Consider, then, Intuitive Surgical's (NASDAQ:ISRG) surgical robot systems, which cause less pain, make smaller incisions, and result in faster recovery times than conventional techniques. The concept is a no-brainer -- and that helps explains why this high-growth stock has delivered a nearly 150% gain since it was first recommended by our Motley Fool Rule Breakers service in April 2005.
A cut above
Intuitive Surgical is a quintessential example of a Rule Breaker. Its da Vinci Surgical System is reinventing its health-care niche and meeting the demands of hospitals, doctors, and patients.
The da Vinci system provides surgeons with "superior visualization" through its 3-D imaging and allows them to make smaller, more precise incisions. The company also advertises that surgeons who use the system can expect improved dexterity and even ergonomic benefits.
Although the da Vinci costs upward of $1 million per system, it provides the cost-efficiency that hospitals crave. Since patients experience fewer complications after a da Vinci surgery, there are fewer post-operative infections to manage and blood transfusions to make, as well less post-operative pain to manage, resulting in shorter hospital stays. For those same reasons, it's also an appealing option for patients -- with some reportedly even requesting the system these days.
As of last quarter, 428 da Vinci systems were installed worldwide, a number that seems bound to grow. What's even sweeter from an investing perspective is the fact that the da Vinci System also generates recurring revenues in the form of instruments and equipment, as well as training and services. That said, it's worthwhile to note Intuitive Surgical's enviable gross margins, which have been steadily and impressively growing since December 2002 -- for the past 12 months, they were at 68%.
Intuitive Surgical has little direct competition and hundreds of patents for its technology both in the United States and overseas. Its biggest challenge is simply convincing the medical industry to accept this revolutionary new method -- when that happens, it's got a deep moat.
This da Vinci code's easy to crack
Granted, Intuitive Surgical alarmed some investors earlier this year when it ratcheted down sales projections due to uncertainty surrounding the upgrade cycle for its new, slightly higher-priced da Vinci S Surgical System. If anything, the stock's pullback represented an opportunity; earlier this year, Intuitive Surgical's price-to-earnings ratio reached 100, an admittedly daunting level; shares currently trade at a less-lofty 40 times earnings.
Despite management's conservative outlook, last quarter showed that the operation's a success. Intuitive Surgical reported a sales increase of 86%, with net income up 59% and gross margin improvement. For the year ended December 2005, revenues increased 64%, with net income up 301% and gross margin clocking in at 68%.
Granted, Intuitive Surgical reported quarterly losses for several years while it geared up its business, even with impressive sales gains. However, its transition into profitability was an abrupt and impressive one. At the end of 2003, Intuitive Surgical reported a loss of $9.6 million, or $0.41 per share; the following year it reported a whopping $23.5 million in net income, or $0.67 per share, as it became clear the da Vinci was really taking off.
Of course, the future's what really matters -- and it remains exciting for Intuitive Surgical. So far, the da Vinci system has made significant progress in prostate surgery, and there are many other areas where its technology could be a boon.
The sharpest stocks around
When David Gardner first recommended Intuitive Surgical in April 2005, only four Wall Street analysts followed the company. (Believe it or not, that's still the case.) That's one of the major elements of Rule Breakers -- to find tomorrow's opportunities today, before the masses have caught on.
Intuitive Surgical is a great candidate to join the ranks of other companies that shake up the status quo and provide a better way of doing things. (Maybe that's why it's been recommended in Rule Breakers three times!) Prime examples of classic Rule Breaker behavior include Netflix's (NASDAQ:NFLX) bold move to undermine old-school, tired players like Blockbuster (NYSE:BBI) in video rentals; XM Satellite Radio (NASDAQ:XMSR) and Sirius Satellite Radio's (NASDAQ:SIRI) aggressive campaign to provide radio the way people want it; Apple Computer's (NASDAQ:AAPL) sudden music mastery with the iPod; Trader Joe's innovative and unconventional approach to grocery stores; and, of course, biotech and medical device companies like Intuitive Surgical, which explore new frontiers in health and wellness.
The focus on disruptive businesses like these have helped Rule Breakers picks deliver an average 12% return, besting the market by 8 percentage points, with many recommendations exhibiting downright outrageous growth. If this sounds like your style, a 30-day free trial to Motley Fool Rule Breakers gives you complete access to all the picks, investing arguments, and a vibrant discussion board community.
After all, couldn't your portfolio use a dose of the cutting edge?
Alyce Lomax does not own shares of any of the companies mentioned. XM Satellite Radio is a Motley Fool Rule Breakers recommendation. Netflix is a Motley Fool Stock Advisor selection. The Fool has a disclosure policy.
