Thursday, January 29, 2009

Intuitive Surgical (ISRG) on Pause

The Intuitive Surgical management team reported fourth quarter 2008 results to analysts on Thursday, January 22, 2009. They also talked about the outlook for 2009. Unlike most of the biotechnology companies that sell therapeutic drugs, Intuitive (ISRG) did take a hit in Q4. As the leading maker of surgical robots, earlier this year its stock price was sky high. But hospitals have become more cautious buyers of Intuitive's da Vinci systems, which cost over $1 million each.

For details on Tuesday's events, see my summary of the Q4 2008 Intuitive Surgical analyst conference. Here I'll concentrate on key take aways.

Revenues of $231.5 million were only down 2% from the third quarter, and were up 22% from year-earlier. The problem for Intuitive's stock price is that investors became use to hypergrowth. It peaked at $357.98 per share in 2008. Today you can buy it at around $104.

Buying opportunity? I don't own the stock, but I'm thinking about buying. It has been obvious for several years that this would be a great company, but its IPO price was rich and it never became reasonable until now. It was last at $100 back in 2006.

Revenues are about evenly split between sales of the actual surgical robots and combined services and accessories (used once, then discarded). Services and disposables revenue will continue to grow as more systems are sold and hospitals use units for more surgeries. The types of procedures surgeons are doing with the robots are increasing. There is a whole sub-industry out there of teaching doctors to use the robots and perfecting various operations with them.

Feedback is that surgeons and hospitals are eager to have these robots. So the hold up is the economy. 85 new systems were sold in the quarter, bringing the installed base to 1111. 30 of the sales were outside the U.S.

The biggest short term concern would be that orders were delayed in December. Are those sales going to go through in Q1? When will hospitals feel confident enough to cause Intuitive to go back to unit growth? No one really knows. Guidance is for system sales to be flat in 2009 compared to 2008. They expect total revenues to be up about 15% in 2009, based on increased services and disposables revenue.

If the economy does not pick up, then a lot less systems may be sold. But given that the machines help hospitals make profits, and many surgeons are excited to have them, if I had to guess I'd say if the economy comes off its low, Intuitive will go back into growth mode as hospitals release funds.

Long term, this is a great stock. Short term, I'd say the middle of the road is slow growth. GAAP earnings were $51 million in the quarter, so say $200 million for 2009. At today's market capitalization of $4 billion, that gives a price to earnings ratio of 20. You can get an even better ratio if you use non-GAAP numbers.

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