Intuitive Surgical Waiting For Normalcy To Return

Between a take-no-prisoners valuation and the ongoing challenges of the pandemic, I'm not altogether surprised that Intuitive Surgical (ISRG) shares have lagged a bit since my last update, underperforming the market, the broader med-tech segment and specific comps like Medtronic (MDT) and Stryker (SYK). The biggest challenge for Intuitive Surgical remains the obvious one - the chaos and uncertainty created by the pandemic, and the uncertain timeline back to normalization for procedures and hospital capital spending.

I wasn't bullish on Intuitive before, solely due to valuation, and that remains the case now. Valuation has long been robust here and that hasn't prevented the stock from performing quite well over time (a trailing 10-year annualized return of over 20%). While I certainly believe that premium valuation is not an impediment to further gains provided the growth stays strong, Intuitive just doesn't fit for my investment approach today.

 

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Intuitive Surgical Waiting For Normalcy To Return

Intuitive Surgical Delivers A Beat, But Procedure Recoveries Seem To Be Lagging

Like Johnson & Johnson (JNJ), Intuitive Surgical (ISRG) bested sell-side expectations for the third quarter, but it wasn't a completely clean beat, as I expect analysts and investors to continue fretting about the pace of the volume recovery in elective/non-emergent procedures. While the long-term outlook for further penetration of robot-assisted surgery is positive, those procedure counts and hospital capital budgets in 2021 could present some near-term risks.

Intuitive Surgical is one of those stocks that trades beyond any rational discussion of valuation. It's basically the only game in town in robotic surgery (excluding orthopedics), and while that will change over time, I expect Intuitive to remain the dominant player in the market. With that, I see double-digit long-term revenue growth as attainable, as well as adjusted FCF margins close to 30%. With the shares well ahead of med-tech valuation norms, the value proposition really comes down to how much you want to pay for a company that will likely have more than 50% share in an addressable market that could reach $18 billion by the end of the decade.

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Intuitive Surgical Delivers A Beat, But Procedure Recoveries Seem To Be Lagging

Seeking Alpha: Intuitive Surgical Set To Regain Momentum In 2015

With the exception of a run in the first quarter of 2014, the space between mid-2013 and mid-2014 was a dead zone for Intuitive Surgical (NASDAQ:ISRG) shares as it became clear that growth at this traditionally high-growth med-tech was slowing. System placements declined sequentially for five of six quarters starting in the first quarter of 2013 and procedure growth slowed as the medical community became less aggressive with prostatectomy procedures and daVinci penetration topped out.

Sentiment has been improving since mid-2014, though, helped by growing penetration in general surgery and optimism that the new Xi and Sp platforms and greater overseas sales efforts will reignite system placements on an extended basis. Although Intuitive will likely start seeing real competition relatively soon, this remains a pretty special company within the med-tech space. The trouble is how much to pay for those special qualities, as the Street is already back to expecting quite a lot of growth from this company.

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Intuitive Surgical Set To Regain Momentum In 2015

Seeking Alpha: Look Past A Sales Transition To Novadaq's Future

Emerging med-tech Novadaq Technologies (NASDAQ:NVDQ) is now entering a new phase of its corporate life. The soured relationship with LifeCell is now in the company's past, and Novadaq is moving forward with a suite of products that offered demonstrated clinical benefits. Transitioning back from LifeCell is going to have a near-term impact on sales, though, and not for the good. Longer-term, I continue to believe that Novadaq can generate more than $1 billion in annual revenue with a portfolio of products that drive better outcomes in open surgery, minimally invasive surgery, and wound care.

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Look Past A Sales Transition To Novadaq's Future

Seeking Alpha: Novadaq Technologies Knocked Back, But A Large Opportunity Remains

In prior pieces on small-cap med-tech Novadaq Technologies (NASDAQ:NVDQ) I've warned investors that emerging med-tech stories don't have smooth, seamless ramps and that this stock's exceptionally high valuation (at least on the short-term outlook) was an invitation to volatility. That has all come home to roost, as the shares that were once 68% above the price where I wrote on them as a Top Idea are now 2% below that level and down about 5% from my more recent piece in May.

I remain a believer in the technology and the market opportunity for Novadaq. There are literally hundreds of thousands of procedures (if not millions) every year where Novadaq's imaging technology makes clinical and economic sense, and with revenue potential of hundreds of dollars per procedure the numbers can get big pretty quickly. Competitive entries seem inevitable (though Intuitive Surgical (NASDAQ:ISRG) has gone unchallenged for a while now) and the company has to navigate an increasingly contentious end to its relationship with LifeCell. Even with those risks, I remain bullish on these shares and believe a fair value in the high teens is reasonable.

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Novadaq Technologies Knocked Back, But A Large Opportunity Remains

The Motley Fool: Why the Market Is Wrong About Intuitive Surgical Stock

Investors were hoping for a good quarter from Intuitive Surgical (NASDAQ: ISRG  ) , so much so that I'm a little surprised to see such a positive market reaction to what was largely an in-line quarter and ongoing murkiness in the market outlook. Strong shipments of the Xi system are encouraging, as was the better-than-expected procedure growth, but utilization is still challenging and Johnson & Johnson (NYSE: JNJ  ) and Covidien (NYSE: COV  ) continue to highlight their own efforts to drive non-robotic minimally invasive procedures with their tools and instruments.

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Why the Market Is Wrong About Intuitive Surgical Stock

The Motley Fool: Johnson & Johnson Focusing on Quality Over Quantity

On May 22, Johnson & Johnson (NYSE: JNJ  ) hosted an all-day analyst day for its medical device business. This meeting didn't really offer any major surprises, but did highlight management's intention to run this business with a focus on returns and scale and an understanding of where the company can (or cannot) likely earn attractive returns for shareholders. All told, this update was not especially bullish for Covidien (NYSE: COV  ) or Intuitive Surgical (NASDAQ: ISRG  ) , but it may stoke ongoing speculation as to additional areas where Johnson & Johnson may look to shrink or expand via M&A.

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Johnson & Johnson Focusing on Quality Over Quantity

Seeking Alpha: Novadaq On A Good Growth Path, But Valuation Makes It Volatile

When a stock trades at more than twice the upper limit of what's considered "normal" for growth stocks in its sector, investors need to be prepared for some significant volatility. It doesn't appear that there's anything really wrong with Novadaq Technologies (NVDQ) other than that this is an emerging med-tech growth story still working to build up its sales capabilities and with a momentum-driven institutional investor base.

That operating expense ran high should surprise nobody who has followed emerging med tech. Placements continue to look strong and while flat recurring SPY revenue was a little disappointing, I believe it is a bump in the road. Valuation is steep here and predicated on major sales and profit acceleration, but this is an interesting speculative med-tech growth story after this pullback.

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Novadaq On A Good Growth Path, But Valuation Makes It Volatile

The Motley Fool: Johnson & Johnson's Earnings Report Impresses

If you're going to have a "messy" quarter, you probably couldn't do it much better than Johnson & Johnson (NYSE: JNJ  ) did in the first quarter. Devices and Consumer continue to log disappointing results, but the higher-margin Pharma business is more than making up the difference. Priced for total annual returns in the mid-to-high single digits, Johnson & Johnson isn't the cheapest health care play these days, but it remains a good all-weather pick with one of the best-growing large drug franchises. 

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Johnson & Johnson's Earnings Report Impresses

The Motley Fool: What's Behind Intuitive Surgical Inc's Revenue Miss?

If surgical robot pioneer Intuitive Surgical (NASDAQ: ISRG  ) is going to keep its heady med-tech growth stock multiple, it has to do better than this. After logging just 4% revenue growth in 2013, Intuitive's announcement of a 24% drop to start 2014 is certainly not a step in the right direction. Some of the trouble may well be from transitory issues like weather and delays tied to hospitals awaiting new product rollouts, but Wall Street is not a forgiving place when high multiple growth stories stop delivering that growth.

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What's Behind Intuitive Surgical Inc's Revenue Miss?

The Motley Fool: Intuitive Surgical, Inc.'s Growing Pains Still Painful

There's a lot about the Intuitive Surgical (NASDAQ: ISRG  ) story that feels familiar. Whether you look at recent examples, like transcatheter heart valves and left ventricular assist devices, or more distant historical examples, like stents, Intuitive Surgical has followed that familiar pattern of "you don't get it ... this changes everything and valuations don't matter" to "oh no! It's not growing to infinity!"

I don't mean to flippant about what has surely been a harrowing couple of years for Intuitive Surgical shareholders. The good news is that clinical data continue to support the argument that robotic surgery deserves its place at the table and has value to offer alongside the minimally invasive tools and approaches advanced by Johnson & Johnson (NYSE: JNJ  ) and Covidien (NYSE: COV  ) . The bad news is that the stock gets whipsawed as short term-focused analysts and institutions obsess over the next year or the next quarter and cannot look at the longer term.
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Intuitive Surgical, Inc.'s Growing Pains Still Painful

Seeking Alpha: Novadaq's Story Continues To Come Along

I don't expect the med-tech sector to match the performance of 2013 this year, but I continue to believe that Novadaq (NVDQ) will be a market-beater. Novadaq has only just begun to show what its imaging technology can do in terms of clinical results, market share, and revenue. As time goes on, I expect this company to be one of the most impressive growth stories in med-tech, and a stock well worth owning.

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Novadaq's Story Continues To Come Along

The Motley Fool: A Sneaky-Smart Med-Tech Buyer Does It Again

Ever since going out on its own, Covidien (NYSE: COV  ) has had a knack for doing deals that left many analysts and investors scratching their heads initially, only to generate better-than-expected revenue and margin synergies from the deals in the years afterward. Coviden is going back to the well again, buying Given Imaging (NASDAQ: GIVN  ) and further building its efforts in the $3 billion GI market.

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A Sneaky-Smart Med-Tech Buyer Does It Again

The Motley Fool: Intuitive Surgical In The Penalty Box

Surgical robot manufacturer Intuitive Surgical  (NASDAQ: ISRG  ) has committed the cardinal sin for high-multiple growth stocks -- the growth has stopped. Investors need only pull up a chart of Heartware or Edwards Lifesciences to see what happens when the music stops and growth investors can't find enough chairs. Intuitive is going to need to show convincing improvements in system placements and procedure volumes to regain the Street's love. Unfortunately, I think that will take a few quarters at a minimum.

I feel like I am in a strange place with Intuitive. Above $450 a share, where the stock has spent most of the past two years, I thought the shares were overvalued and that almost everything had to go right for the stock to work from those levels. Although I wouldn't go as far as to say that Intuitive has been beaten into a value stock, I do believe that robot-assisted procedures are here to stay and that Intuitive has a major lead on any prospective rivals. Moreover, with growth harder to come by in the device world these days, maybe Intuitive could actually find itself in play if the stock languishes further.

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http://www.fool.com/investing/general/2013/10/18/intuitive-surgical-in-the-penalty-box.aspx

MassDevice: Once More Unto The Breach With Intuitive Surgical

The stock market is a funny place, and it's not all that uncommon for an analyst or investor to find himself defending a company/stock he once was not all that interested in owning. That's where I'm at these days with Intuitive Surgical (NSDQ:ISRG), as although I'm accustomed by habit to lamenting Wall Street's excessive enthusiasm for the company and the "everything is awesome" blue-sky feedback from docs during due diligence calls, sentiment has shifted quite a bit over the past few months.

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http://www.massdevice.com/blogs/massdevice/once-more-unto-breach-with-intuitive-surgical

The Motley Fool: Should Johnson & Johnson Be Looking For A Cougar In Devices?

Several years ago, Johnson & Johnson (NYSE: JNJ  ) realized it had a problem with its drug business. This wasn't a particularly poignant revelation, as the struggles of the business from around 2004 to 2010 were pretty easy to see, but the company went and did something about it. Licensing agreements with Bayer and Mitsubishi Tanabe brought in drugs like Xarelto and Invokana, while the billion-dollar acquisition of Cougar Biotechnology ultimately turned into the blockbuster prostate cancer drug Zytiga.

I mention this because other parts of J&J could use some TLC. Not only is the consumer/over-the-counter business still on a slow path to recovery from repeated product quality and recall issues, but the device business has turned into a perpetual disappointment with low organic sales growth. While the large acquisition of Synthes (announced in 2011, completed in 2012) has spiffed up the orthopedics business, I think it's worth asking whether Johnson & Johnson should think about going Cougar-hunting in the device space.

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http://www.fool.com/investing/general/2013/09/09/should-johnson-johnson-be-looking-for-a-cougar-in.aspx

Seeking Alpha: Novadaq On Track To Bring Excellent Growth To Light

With second quarter results in hand, Novadaq (NVDQ) continues to look like a rare med-tech story with both very strong growth and large addressable markets trading at something close to a reasonable valuation. "Reasonable" is a subjective assessment, of course, it will take many years of exceptional growth for Novadaq to earn its valuation, but I believe the company's strong portfolio of surgical imaging technologies can drive that growth.

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Novadaq On Track To Bring Excellent Growth To Light

Investopedia: The Street Has Caught Covidien

For most of 2012 and 2013, Covidien (NYSE:COV) was the not-so-little med-tech that could. In an environment were companies like Johnson & Johnson (NYSE:JNJ), Bard (NYSE:BCR), Stryker (NYSE:SYK), and Abbott (NYSE:ABT) were struggling to deliver sustained attractive growth in devices, Coviden managed to do so. Now, though, it looks like the Street has caught up with Covidien's prospects and the sequential deceleration in device growth could make it harder for these shares to outperform. Still, as one of the best companies in a still-popular sector, I wouldn't be in a hurry to sell if I owned shares.

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Investopedia: Intuitive Surgical Burning Up On Re-Entry

Surgical robotics leader Intuitive Surgical (Nasdaq:ISRG) consistently posted exceptionally strong growth for a long period of time, gaining an out-of-this world valuation from the Street in the process. Now investors having to re-learn a familiar med-tech lesson all over again – if something looks to good to continue, it probably won't. Although I'm still bullish on the underlying thesis that Intuitive Surgical will continue to see growing adoption and procedure counts, investors are seeing a harsh reassessment of the company's growth prospects and the “fair” price to pay for those prospects. I believe that Intuitive Surgical shares are too cheap at these levels, but investors considering the stock ought to remember that the bias of the Street will likely be against the shares for a couple of quarters.

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Investopedia: Intuitive Surgical's Miss Looks Systemic And Company-Specific

It wasn't so long ago that Intuitive Surgical (Nasdaq:ISRG) was one of the cleanest growth stories in med-tech, as hospitals seemingly couldn't buy the company's surgical robots fast enough. Not only did Intuitive's daVinci robot come to all but dominate the prostatectomy market, but it was well on its way to taking significant share in hysterectomy as well.

Then the bad news began. From reports of surgical complications to multiple papers alleging that robotic surgery is not cost-effective, the news flow turned decidedly negative even as procedure counts continued to grow.

Now we have a major quarterly earnings miss to digest. While there are enough rumblings out there to suggest that it's not a solely Intuitive-specific issue and the procedure growth numbers still look decent, it looks this highly-valued stock is going back into the penalty box. I do believe Intuitive continues to offer above-average growth in the med-tech space, though, and the reality is that this stock only seems to get cheap when the news flow gets pretty scary.

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