Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples
  • The consistency of past earnings and cash flow
  • How much growth we can expect

Let's see what those numbers can tell us about how cheaprobotic surgery innovator Intuitive Surgical (Nasdaq: ISRG) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Intuitive Surgical has a P/E ratio of 30.5 and an EV/FCF ratio of 22.0 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Intuitive Surgical has a P/E ratio of 53.6 and a five-year EV/FCF ratio of 42.8.

A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

Intuitive Surgical is zero for four on hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 


1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Intuitive Surgical





Medtronic (NYSE: MDT)





Stryker (NYSE: SYK)










Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.

Numerically, we've seen how Intuitive Surgical's valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Intuitive Surgical's net income margin has ranged from 21.4% to 29.5%. In that same time frame, unlevered free cash flow margin has ranged from 18.5% to 31.6%.

How do those figures compare with those of the company's peers? See for yourself:

Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.

Additionally, over the past five years, Intuitive Surgical has tallied up five years of positive earnings and five years of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Intuitive Surgical has put up past EPS growth rates of 40.9%. Meanwhile, Wall Street's analysts expect future growth rates of 24.7%.

Here's how Intuitive Surgical compares to its peers for trailing five-year growth:

Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of Intuitive Surgical are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 30.5 P/E ratio.

Intuitive Surgical shows classic growth numbers: high multiples on earnings and cash flow, high previous growth, and high expected growth. What impresses me about Intuitive Surgical is that it's a growth story that is already making money -- and at high margins. I don't believe the growth story at a company like Netflix (Nasdaq: NFLX). It may be able to transition its business model from DVDs to streaming, but I'm not paying 65 times earnings for it. But Intuitive Surgical is one of the few growth stories I really can believe in. Surgery via robots? Now that's something I can get behind!

I bought in a long time ago at a significantly lower price, but if Intuitive gets back around $250, I'll be tempted to add some more shares.

If you find Intuitive Surgical's numbers compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you.

Interested in reading more about any of these stocks? Add them to My Watchlist to find all of our Foolish analysis on this stock.

Anand Chokkavelu owns shares of Intuitive Surgical, which is a Motley Fool Rule Breakers recommendation. Stryker is a Motley Fool Inside Value choice. Netflix is a Motley Fool Stock Advisor pick. The Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.