Intuitive Surgical: The Medical Robotics 800 Pound Gorilla
Sep. 17, 2018 8:00 AM ET
18 comments About: Intuitive Surgical, Inc. (ISRG)
Joe Younger
Growth, dividend investing, long-term horizon, medium-term horizon
Summary
Intuitive Surgical is the 800 pound gorilla in the medical robotics space and growing larger every day.
Its latest innovation is revolutionizing lung biopsy procedures via a tiny robotic catheter.
Fundamental growth is phenomenal for a company of its size.
Its recurring revenue model is lucrative, and it is building an enviable cash position.
Is a dividend in the near future?
Introducing the 800 Pound Gorilla 
The Intuitive Surgical Gorilla gaining a few pounds... Source: Steve Bidmead, Pixabay
Make no mistake, Intuitive Surgical, Inc. ( ISRG) is the dominant force in robot-assisted surgery. Conceived in the 1980s as part of a US military program exploring means for conducting remote surgery on the battlefield, Intuitive's surgical robots have been under continual refinement and role-expansion for decades; the company was founded in 1996 and went public in 2000. What began as a science-fiction curiosity has rapidly grown to become an accepted method of surgery; and in fact, increasingly the preferred method. Incisions are smaller, surgeries are faster and more precise, and recovery times are quicker and with fewer post-operative complications. In this article, I will reveal just how gigantic Intuitive has grown over the last twenty years and discuss its latest expansion plans (take a deep breath). I will examine how, because of its revenue model, Intuitive's immense size is a tactical advantage. I will discuss Intuitive's stellar fundamentals - some of the best of any large company - and lastly, I will end the article with a technical look at the stock's price chart.
Before I go further, I encourage you to watch this exceptional two-minute video introduction to Intuitive Surgical: Intuitive by the Numbers (I will provide the link at the end of the article, as well)
How big has this robotic gorilla become? Here are some eye-opening statistics that will give you a sense of Intuitive's size:
Every 36 seconds, a surgeon performs a minimally invasive da Vinci machine procedure.5 Million da Vinci procedures have been performed worldwide; 875,000 in 2017.There are 43,000 da Vinci surgeonsThere are 4,409 da Vinci machines in all 50 states and on 6 continents.Currently, Intuitive has a market cap of $61.19 Billion. Its 5 surgical systems help surgeons perform a multitude of surgeries in the broad categories of Abdominal, Colon, Gynecological, Heart, Neck, and Head.
Allow us to introduce ourselves... Source J.P. Morgan Healthcare Conference
Intuitive's New Innovation: A Safer Lung BiopsyIntuitive is constantly innovating and expanding; its latest medical marvel is a robotic instrument for lung procedures. It utilizes CT scans to create a "road map" and then navigates lung airways with a tiny, flexible, snake-like catheter to take biopsies far in the periphery of the lung. Lesions residing in the lungs are difficult and dangerous to access, which often causes doctors to take a watch and wait approach, a decision which can lead to tragic results. Intuitive's device will allow for a much less invasive biopsy procedure, leading to less biopsy complications, more biopsies, and saved lives... and, of course, added revenue for Intuitive Surgical.
What's the addressable market for this new device? In a word: huge. Lung cancer is the world’s leading cause of cancer deaths - 20% of cancer deaths in Europe and 25% in the United States. In China alone, 91 people are diagnosed with lung cancer every hour, every day (Source: Intuitive: What Matters).
Here is a two-minute video for those of you wishing to learn more about Intuitive's latest surgical system: Intuitive's Lung Biopsy Machine)
Source: Lung Biopsy
Phenomenal Growth for a Large CompanyIntuitive's sales and EPS growth are impressive for any company, but when you consider that this is not a nimble little small cap but a massive $61.19 Billion market cap company, the percentage growth it has achieved over the last four quarters is phenomenal. Here are the stats:
Sales Percentage Growth (year-over-year):
September 2017:
| +18% | December 2017:
| +18%
| March 2018:
| +25% | June 2018:
| +20% |
EPS Percentage Growth (year-over-year): :
September 2017:
| +34% | | December 2017: | +28% | | March 2018: | +43% | | June 2018: | +38% |
No, these numbers aren't perfect - in a perfect world, we would see increasing percentages each quarter, but a company this big putting up sales numbers above 20% and EPS figures in the 30-40% range is very impressive. The total EPS estimate for 2018 is $10.84. In my opinion, when a company hits $10+ annual EPS, it is officially a money-making machine.
One other statistic of note: fund ownership (the big players with the deep pockets) grew from 1527 funds in September 2017 to 1809 in June 2018. Obviously, the increase in number of funds is good, as it indicates more money being poured into the stock, but also, the sheer number of funds is amazing and will provide stability to the stock price. Once funds do their research and jump through all of the bureaucratic and logistical hoops to initiate buying, they buy for weeks, months, or even years, and they like to hunker down for the long term.
Consumer Loyalty and Recurring Revenue: Intuitive's Aces in the HoleA traditional sales company has to keep selling more and more products to grow. Nike ( NKE), for example, has to sell more and more shoes, or it has to expand its product line - put the Nike Swoosh on sweatshirts, then t-shirts, then socks. Eventually, it becomes a victim of its own success; the larger it becomes, the harder it is for it to grow significantly. What's more, with a company like Nike, it's success is subject to the whims of the consumer. A typical consumer might grow tired of Nike sneakers for innumerable reasons and suddenly switch to another brand.
Like a traditional growing sales company, Intuitive is selling more and more surgical machines, but it has two distinct advantages: Steadfast consumer loyalty and recurring revenue. Obviously, a hospital's decision to buy da Vinci Surgical system is not one made on a whim; its doctors receive many hours of training and then spend months or years building a comfort level and true mastery of the machine. They are not going to wake up tomorrow and suddenly switch brands, like a consumer switching shoes. I do not know what the churn rate of Intuitive's machines is, but I suspect that once one is installed in a hospital, it generally stays in service, and it would only be removed if a truly superior machine came on the market; and even then, doctors would be loathe to switch to a different system. And, to my knowledge, a superior surgical robot system is not on the market.
The second big advantage is recurrent revenue. Once a surgical system is installed, Intuitive makes money from service fees, leasing of systems, system upgrades, instruments, and accessories. Added together, 71% of second quarter 2018 revenue ($643 million) was recurring revenue ( ISRG 2nd quarter cc transcript). In summary, Intuitive's brand loyalty and recurring revenue business model are two key factors in the company's multi-decade success.
The Cash Pile: A lot of BananasThe last fundamental I would like to focus on is the tremendous amount of cash Intuitive is stockpiling. Intuitive ended second quarter with cash and investments of $4.3 BILLION, compared with $4.1 billion on March 31, 2018. That is a lot of cash, which Intuitive can use for stock repurchases, acquisitions, new growth initiatives, etc. Intuitive did not repurchase any shares during second quarter, and it has approximately $718 million remaining under board buyback authorization. I assume that when there is a correction in stock price, management will put this $718 million into action and buy back shares, making existing shares more valuable and helping to provide share price stability. And, while there was no mention of a potential future dividend during the second quarter conference call, it seems like an inevitability given the company's growing cash stores, and that, of course, is a positive.
Oh and by the way, Intuitive Surgical has no debt.
That's a lot of bananas this gorilla is sitting on... Source: pxhere.com
A Beautiful Trend ChannelThere are no sure things in life, except death, taxes, and bad pop music. That being said, Intuitive's stock price has been trending upwards for twenty years, printing a few classic consolidation patterns along the way, and growing from a split-adjusted price of $2 on April 3rd, 2001 to today's price pushing $600. That, my friends, is a thing beauty. Here is the twenty-year chart, with a variety of identified consolidation patterns for you technical analysis fans:
Chart Courtesy of StockCharts.com
What we have seen here, for nearly twenty years, is a rising stock price with traditional chart patterns breaking out to the upside. Though we all know what they say about "past performance," given Intuitive's stellar fundamentals, it seems relatively certain that the stock price will continue to follow its past habits, until fundamentals change significantly or there is a cataclysmic macro-economic event. One should note, however, that over the last two years there has not been a significant price consolidation, and visually it does seem that a multi-month consolidation is due. I am not going to sit on the sidelines waiting for one, however, and I recently added to my position, with the understanding that at some point, the price will consolidate again and build another pattern. I would advice potential buyers to wait for the price to fall back near the 50 day line, a phenomenon that has been occurring roughly once a month. (Pointed out on this one-year chart:) I also encourage buyers of any stock to phase-into a position, rather than purchasing all of the shares at once.
Chart Courtesy of StockCharts.com
Final Thought:Intuitive Surgical is the 800 pound gorilla in the medical robotics industry, and it is an excellent candidate for any investor seeking stable, long-term growth with dividend potential.
And lastly, for those of you new to Intuitive Surgical, please understand that Intuitive's robots are essentially surgical instruments; they do not autonomously perform surgeries like the robots tending to Luke in The Empire Strikes Back... yet.
(Luke Skywalker, a bit worse for wear, attended to by his medical robots in The Empire Strikes Back) Source: YouTube Screen Capture
Here is the link again to the stellar two-minute video introduction to Intuitive Surgical: Intuitive by the Numbers, and just for fun (and to get a visual understanding of Intuitive's surgical prowess), here is a short video of a Da Vinci machine performing surgery on a grape: Suturing A Grape
Please do post your comments and questions regarding Intuitive Surgical on the comment board below, and/or share ideas on other medical robotics companies in this revolutionary industry. I enjoy reading them (most, anyway) and will respond when I can. Also, feel free to become a follower of my articles, if you are so inclined. I write about biotechs, growth stocks, and investing strategy, as well as an occasional technical analysis blog post.
Source: pixabay.com
Disclosure: I am/we are long ISRG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a professional stock analyst or money manager, and the information provided is for educational purposes only; it is not a recommendation to buy or sell a stock. Please do your own research and invest accordingly.
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