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To: John Carragher who wrote (41982)	4/18/2008 10:13:06 AM
From: Bill Harmond	Read Replies (2) \| Respond to of 57684

Me too. I'm surprised by this. There's nothing wrong fundamentally.

To: John Carragher who wrote (41982)	4/18/2008 10:40:26 AM
From: Bill Harmond	Respond to of 57684

Medical Devices Intuitive Surgical, Inc. ISRG – $348.50 Accumulate Price Target: $360.00 ISRG: Strong Quarter, But... Downgrading To Accumulate THINK ACTION: We believe there is no doubt about the strength of the company or the 1Q results. However, we think the ongoing outperformance in 2008 will help ISRG grow into its valuation multiple, much like 2006 where the company did well, but the shares were volatile, and they did not appreciate. We reiterate our $360 price target, but downgrade the shares to an Accumulate rating from Buy. KEY POINTS: Outperformance Drivers: System Sales And Low R&D Spend 1Q beat revenue expectations by 6%, and EPS results were 14% above expectations. The revenue beat was driven by four more system sales than we anticipated. ISRG posted 74 sales (plus two trade-ins) versus our estimate of 68. EPS of $1.12 was above our $1.04 estimate largely due to extra system sales and lower R&D spend than expected, but we expect the R&D spend to come throughout 2008. Wise Selling Strategy Should Drive Growth With so many potential da Vinci procedures spanning several specialties, it takes a good sales rep to reach out to all the relevant doctors in any given hospital. We believe the long-term continued success of the da Vinci platform requires multiple doctors using it often. ISRG's strategy to increase the field sales rep concentration (from five robots per rep to four) will drive greater utilization and second system sales into existing customers. The risk of this strategy is creating robotic surgery market concentration, where new centers are disincentivized to buy a system because a local center already has a corner on the market. Why The Downgrade? We are bullish on ISRG's ability to execute and grow at very strong rates; however, we do not think this will correlate to share appreciation from current levels. For a historical reference, in 2005 the stock performed very well, in line with the company and in anticipation of a very strong 2006. The financial results in 2006 were great, in our view; nevertheless, the stock was very volatile, and it did not appreciate. We believe a similar story is playing out now, with 2007 representing a year with impressive company performance and impressive share appreciation, and in 2008, we believe the multiple will "catch up" as the company grows. We anticipate minor share appreciation (less than 20%) over the next year with multiple contraction. We are reiterating our $360 price target but downgrading to Accumulate.