Here's Why You Should Retain Intuitive Surgical for Now

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.

The company currently carries a Zacks Rank #3 (Hold).

Price Performance

Shares of Intuitive Surgical have gained 10.3% compared with the industry’s growth of 10.5% on a year-to-date basis. Meanwhile, the S&P 500 Index has rallied 17.1% in the same timeframe.

What’s Deterring the Stock?

Intuitive Surgical has been witnessing contraction in margins for time quite some time now.
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 second quarter of 2019, da Vinci procedure improved 17% globally from the second quarter of last year. This was driven by healthy growth in U.S. General Surgery. In the last reported quarter, Intuitive Surgical placed 273 da Vinci surgical systems, with the installed base growing 13% year over year to approximately 5,270. In fact, it now forecasts 2019 procedure growth to be 16-17% compared with the previously anticipated rise of 15-17%.

Intuitive Surgical is gradually gaining prominence in markets outside the United States. In the second quarter of 2019, international revenues rose 19% 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 the second quarter of 2019 compared with 82 units in the second quarter of 2018. Of these, 30 were in Europe, 24 in Japan and eight 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 second quarter, total recurring revenues were $780 million, up 21% year over year and accounting for a whopping 71% of total revenues.

Recurring revenues, as a proportion of total revenues, continue to grow at a much higher rate as compared with system sales. This ensures a regular 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 $4.33 billion, indicating an improvement of 16.3% from the year-ago quarter. The same for earnings stands at $10.12 per share, suggesting growth of 6.6% from the year-ago reported figure.

Key Picks

Some better-ranked stocks from the broader medical space are Nissan Chemical Corporation NNCHY, Straumann Holding AG SAUHF and McKesson Corporation MCK, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank  (Strong Buy) stocks here.

Nissan Chemical has a long-term earnings growth rate of 10%.

Straumann Holding has a long-term earnings growth rate of 18%.

McKesson has a long-term earnings growth rate of 6.9%.

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Intuitive Surgical, Inc. (ISRG) : Free Stock Analysis Report
 
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