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Here's Why You Should Hold on to Intuitive Surgical for Now

Zacks Equity Research

Intuitive Surgical, Inc. ISRG is well poised for growth on improving adoption of da Vinci Surgical System, strong international presence and solid recurring revenue base. However, contraction in margins remains a concern.

Shares of Intuitive Surgical have gained 23.5% compared with the industry’s growth of 22.2% in a year’s time. Meanwhile, the S&P 500 Index has rallied 28% in the same timeframe.

The company, with a market capitalization of $68 billion, designs, manufactures and markets the da Vinci surgical system and related instruments and accessories. Notably, the da Vinci surgical system is an advanced robot-assisted surgical system. It anticipates earnings to improve 11.8% over the next five years. Moreover, it has beat estimates in the trailing four quarters by 6.4%, on average.

Let’s take a closer look at the factors that substantiate the company’s Zacks Rank #3 (Hold).




What’s Deterring the Stock?

Intuitive Surgical has been witnessing contraction in margins for time quite some time now. In fact, in the third quarter of 2019, the company’s operating margin in the quarter was 41%, down 140 bps.

Management expects margins to fluctuate based on a mix of new products and systems. Further, the company is incurring additional costs for expansion in markets outside the United States, which in turn is adding to woes.

What’s Favoring the Stock?

Intuitive Surgical’s robot-based da Vinci surgical system enables minimally-invasive surgery, which reduces risks associated with open surgery. The company continues to gain from this system, which in turn boosts overall performance.

In the third quarter of 2019, da Vinci procedures grew 20% globally compared with the prior-year quarter. The upside was driven by healthy growth in U.S. General Surgery. In the third quarter, Intuitive Surgical placed 275 da Vinci surgical systems, with the installed base growing 12% year over year. In fact, it now anticipates 2019 procedure growth to be 17-18% compared with the previously anticipated rise of 16-17%.

Intuitive Surgical is gradually gaining prominence in markets outside the United States. In third-quarter 2019, international revenues rose 36% year over year, owing to solid show by the Instruments & Accessories segment.

Notably, the segment grew on solid procedure growth and customer buying patterns. Intuitive Surgical placed 80 systems in third-quarter 2019 compared with 90 units in third-quarter 2018. Of these, 36 were in Europe, 27 in Japan and 10 in China.

Intuitive Surgical’s business model ensures that it continues to generate revenues from initial capital sales of da Vinci Surgical Systems, and subsequent sales of instruments, accessories and services. In the last reported quarter, total recurring revenues were $817 million, up 24% year over year and accounting for a whopping 72% of total revenues.

Recurring revenues, as a proportion of total revenues, continue to grow at a much higher rate compared with system sales. This ensures a steady stream of income, even in testing times. Moreover, Intuitive Surgical operates in a niche MedTech market, with no direct competition, which is a major positive.

Which Way Are Estimates Headed?

For 2019, the Zacks Consensus Estimate for revenues is pegged at $4.40 billion, indicating an improvement of 18.1% from the year-ago quarter. The same for earnings stands at $12.53 per share, suggesting growth of 14% from the year-ago reported figure.

Stocks to Consider

Some better-ranked stocks from the broader medical space are Cardinal Health, Inc. CAH, West Pharmaceutical Services, Inc. WST and DexCom, Inc. DXCM, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cardinal Health has an expected long-term earnings growth rate of 6.2%.

West Pharmaceutical has an estimated long-term earnings growth rate of 14%.

DexCom has a projected earnings growth rate of 260% for the next quarter.

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