Intuitive back on top (and how they might be getting their groove back)!

Now that we’ve quickly gone through 2016’s year in review, one of the newcomers to the Top 10 is long time favourite Intuitive Surgical (#2 on the list and likely #1 when I update January’s holdings) – accounting for more than 10% of the portfolio.

At a Glance:

Symbol: US-ISRG
Price: $697.02
Market Cap: $27.11B
Yield: N/A

The last time we wrote about Intuitive Surgical was just over 2 years ago.  Back then, the company was showing signs of recovering from a brutal 2013 – finally experiencing single digit procedural growth after a year of dealing with malpractice lawsuits, FDA investigations, and many reports downgrading the stock.

At the time, we identified four criteria (+1 prediction) for adding more to our position:

  1. A further sell-off / drop in share price (unless something significant changed the company’s business model)
  2. Double-digit growth in procedures
  3. Revenue starts consistently trending upward
  4. FDA approval of da Vinci for use for other procedures, and
  5. A prediction that I would likely be paying more than the current price then of $465 if I was going to add to my position

So, how did we do?:

Criteria Result Reason
Further sell-off N/A No significant drops in stock price occurred to take advantage
Double-digit growth in procedures Q1 2015 YoY Procedure Growth Rate = 12.7%
Q2 2015 YoY Procedure Growth Rate = 14.1%
Q3 2015 YoY Procedure Growth Rate = 15.7%
Revenue Trend Q1 2015 YoY Revenue Growth = 14.5%
Q2 2015 YoY Revenue Growth Rate = 14.4%
FDA Approvals N/A No FDA approvals but plenty of new procedures and technologies appear in the pipeline
Paid >$465 Buy June 2015 ~ $495
Buy January 2016 ~ $550
Buy August 2016 ~ $680
Buy December 2016 ~$620

So, we mostly ended up buying new share as a result of Q1 to Q3 2015 results:

isrg-transactions-2005-2016

Intuitive Surgical Buys and Sells (2005 – 2016)

With our criteria of double digit procedure and revenue growth met, it was surprising that shares were only up 10% since we identified the criteria.  Eventually, this turned out to be great timing as the stock started to rally in mid-2016 once growth across all 3 lines (system, accessories, and services) experienced double digit growth (where we then added more shares again).

isrg-revenue-breakout-2004-to-2016

Revenue Breakout and Share Price (2004-2016)

isrg-revenue-and-procedure-growth

Year over Year Revenue and Procedure Growth (2009 – 2016)

While the days of 30%-50% growth might be behind us, there’s nothing wrong with a company that can grow revenues at a double digit pace.  Much like our post two and a half years ago, we’re happy with what we hold today, but looking to add more if some or all of the following occur:

  • Sell-off / Drop in Share Price for no reason (which we have already acted on!)
  • FDA approval for new procedures
  • Signs of exponential growth (in systems, accessories, and procedures) outside of the United States
  • [Added 17-Feb-17]: One prediction to go along with the last – I’ll likely be paying more than $700 when the above two items occur

The third criteria is really the one worth monitoring closely – as I’ve always mentioned, the biggest reason for owning Intuitive Surgical has been on the continued adoption of robotic surgery as a cost effective and safer alternative to open surgery.  The latest quarter hasn’t provided a report on the breakout of US vs. outside-of-US (OUS) numbers yet, but for the majority of 2016, OUS revenues percentage of total revenue was flat at ~27%.  We really want to see OUS revenue start to become a larger and larger portion of total revenue as the number of international procedures are ideally magnitudes larger in size.

If there’s any doubt on why it’s important to look at the adoption rate of da Vinci surgeries (and OUS), look no further than 3 slides from an investor presentation published late 2015:

It has taken over 10 years for robotic surgery to become the standard of treatment for prostatectomies and hysterectomies in the United States.  There’s a huge market outside of the United States that Intuitive Surgical has an opportunity to capture. By the company’s own estimation – as many as 4 million annual procedures for products currently available in countries they already have clearances. If Intuitive can capitalize on those new markets and procedures, then we just might get to experience those hyper-growth days of the past.

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2 thoughts on “Intuitive back on top (and how they might be getting their groove back)!

  1. Pingback: News for Today (13-Feb-17): Bye bye Zeltiq, it’s been cool knowing you for the short time we did (ZLTQ) | Fearless Cal's Investment Journal

  2. Pingback: Portfolio Update – April 2017 (+4.0%, +2.1% Currency) | Fearless Cal's Investment Journal

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