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It's a little unreal nominating Intuitive Surgical (NASDAQ:ISRG) as a bargain stock.

This is, after all, the stock that had a trailing P/E of 60 in 2004, when people called it overpriced. Of course, they were wrong, and it nearly tripled within a year.

And then in 2006, when the P/E topped 50, people again called it expensive. And it tripled a year later -- again.

Now it sports a P/E of less than 25.


This is a company that's seen trailing-12-month revenue increase 59% year over year. No matter what you think of high-growth stocks, that 25 P/E is pretty darn cheap.

It's the future, stupid
OK. So P/E isn't the best indicator of value. It's backward-looking, after all, and the future might not be so great for the surgical robot maker. Maybe.

Intuitive Surgical is dependent on hospitals for sales of the da Vinci robot, and right now investors don't seem to have much confidence that hospitals will keep spending as they have in the past. Just take a look at how much Intuitive Surgical and some of the other medical device makers have fallen this year.


Year-to-Date Return

Intuitive Surgical


Kinetic Concepts (NYSE:KCI)


Boston Scientific (NYSE:BSX)


Medtronic (NYSE:MDT)




Stryker (NYSE:SYK)


Zimmer (NYSE:ZMH)


Source: Morningstar as of Nov. 26, 2008.

So much for health care being a recession-proof industry.

Razors and blades
However, unlike many of the others in the table above, Intuitive Surgical works under the same business model as Gillette did with its razors. It sells the robots (the "razors") for a lower gross margin in order to make more money on the accessories (the "blades") at a higher margin.

The fringe benefit of this model is that there are more than 1,000 robots installed in countries all over the world. That's a lot of machines generating revenue from accessories, quarter after quarter. While the purchase of robots might slow down, people are still going to go in for surgeries, and the hospitals are still going to burn through accessories, even in bad economic times. After investing all that capital in the robot, hospitals aren't going to let it gather dust.

Of course, if hospitals do run into a credit crunch, Intuitive Surgical could always use some of its $400 million in cash and short-term investments to help hospitals finance their purchases (although based on previous management comments, it's more likely to sell to third-party leasing companies). This would help expand the installed base, which helps drive future revenue.

Even if sales do slip, it sounds like Chairman and CEO Lonnie Smith knows that the bottom line, which is driven by margins, is most important. In an interview with the Rule Breakers team, he said, "Fixed and variable costs are important to us. We are big believers in lean manufacturing and lean processes." (You can read the rest of the interview, and get the team’s take, by grabbing a free trial of the newsletter.)

I have no idea whether this is the bottom for Intuitive Surgical. It's entirely possible that the stock could go lower.

What I do know is that if you buy at this price, you're getting a good company with an excellent moat that hasn't actually reported a slowdown yet. Imagine what will happen if revenue growth slows down to just 40% or so. That deflated P/E is going to look mighty cheap at that level.

If you agree that this company will be able to cut through the pessimism that has been bestowed upon it, join me in picking Intuitive Surgical to outperform the market in Motley Fool CAPS. If you think there's no recovery in sight, pick it to underperform.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.