Earnings Scorecard: Intuitive - Analyst Blog

Intuitive Surgical (ISRG) reported favorable fourth-quarter 2010 results on January 20. Earnings per share came in at $3.02, beating the Zacks Consensus Estimate of $2.26.

Fourth Quarter Review

Revenues increased 21% year over year to $389 million, beating the Zacks Consensus Estimate by $17 million. Recurring revenues grew at a brisk pace and constituted just over one-half of sales in fiscal 2010.

Instruments and accessories revenues were $151 million in the quarter, up 33% year over year. Worldwide procedures increased 35% in fiscal 2010. The company experienced growth in both existing and new procedures. Hysterectomy was the primary growth driver and da Vinci Hysterectomy (including both malignant and benign categories) was up by a sharp 59% while Urology continued on a growth trajectory. Emerging procedures (mymectomy, thyroid, head, neck and colorectal) also did well, in 2010, up 47% year over year. Prostatectomy, a leading procedure, stagnated in the U.S.

The company posted total systems revenue of $178 million in the quarter, up 10%. Intuitive sold 124 systems in the fourth quarter versus 110 systems in the year-ago period. The company had an installed base of 1,752 at year end, up 26% year over year.

Services/Training revenue was $61 million in the quarter, up 27% year over year, primarily due to growth in the installed base of da Vinci Surgical systems.

We have discussed the quarterly results at length here: Intuitive Beats Zacks Estimates

Agreement – Estimate Revisions

Estimates for fiscal 2011 demonstrate a mild upward trend since the announcement of the fourth quarter results, reflecting a lukewarm directional agreement. Out of 14 analysts covering the stock, only 2 raised their estimates for the current year, over the last 7 days, with no negative revision. A similar trend is observed for fiscal 2012.

Magnitude – Consensus Estimate Trend

Positive revisions coupled with a directional agreement have led to an increase in annual forecasts for Intuitive Surgical. There has been an increase in estimates of 12 cents for 2011, and 8 cents for 2012, over the last 7 days. The current Zacks Consensus Estimate for fiscal 2011 is $10.93, reflecting a 15.39% year-over-year increase.

Intuitive Remains “Neutral”

We expect a number of procedures that are currently completed either in an open surgical manner or with laparoscopy to be eventually replaced by da Vinci surgery, as robotic surgery becomes the standard of care in many instances. The company enjoys a virtual monopoly in robotic surgery with little competition.

Intuitive's recurring revenue stream continues to grow and provides a shield against cyclicality of revenues, arising from the sale of discretionary capital equipment to hospitals. However, we believe that until the global economy recovers, the stock may come under pressure as investors ponder whether lingering macro economic uncertainty weakens hospitals' commitment to buy high-cost robotic systems. The pace of adoption of robotic surgery may therefore be lumpy and growth in usage requires acceptance from patients and training to medical practitioners.

In the interim, the installed base of Intuitive continues to grow as more hospitals feel compelled to upgrade their technology. In balance, a reasonable valuation is appropriate given such plus points as Intuitive's leading position in robotic surgery, barriers to entry, steady cash flow, sizeable cash balance and absence of debt.

Intuitive Surgical's razor-blade business model ensures recurring revenues even during difficult times. Moreover, its revenues have consistently grown due to the twin reasons of increase in applicable medical procedures and, secondly, hike in the company's installed base. Among significant risks, pricing pressure is the most critical as austerity measures in Europe and elsewhere target hospital capital expenditure as an area of cost savings.

Intuitive signed a licensing pact, on August 17, 2010, with Cardica (CRDC) under which it obtained the exclusive global license to Cardica's intellectual property, related to tissue cutting, stapling and clip appliers for application in the robotics field. Intuitive competes with Accuray (ARAY).

We prefer to remain on the sidelines until the global markets recover, despite the da Vinci system's leading status as an enabler of robotic minimally invasive surgery. Our Neutral recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/.

 
ACCURAY INC (ARAY): Free Stock Analysis Report
 
CARDICA INC (CRDC): Free Stock Analysis Report
 
INTUITIVE SURG (ISRG): Free Stock Analysis Report
 
Zacks Investment Research