I reviewed Intuitive Surgical, one of my favorite companies, in early March, suggesting that it could move from the $90 price at the time to $125 by year-end. Well, with a lot of help from the market and what I believe was stellar execution in a very tough environment during Q1, the stock closed at $130 on Friday. As I incorporate the new information into my view regarding the current valuation, I find the stock probably stretched near-term but capable of rising as the year progresses if they are able to exceed current expectations or if the market continues to be more forward-looking than it has been up until recently.
Having followed the company for almost 5 years now, I have to say that Thursday was one of the strangest days ever. First, the company accidentally filed its 8-K early, and the stock plunged initially on what was clearly a headline miss. It traded as low as 106 in the pre-market. As it became clear that there was a special situation impacting reported numbers, the stock rallied sharply and then traded above 130 (still in pre-market!). During the day, it traded between 113 and 127, closing almost unchanged at 118. During the call, as the company announced it was "suspending" certain key elements of its full-year guidance, the stock plunged below 105 briefly before ending the after-hours session near 110. The range on Friday was 114-132, closing at 130 and leaving the stock now up year-to-date. Wow!
I suggest reading the transcript if you are interested in the company. It was very clear that the long-term story is intact, with procedural growth up 60% year-over-year. The deferral, which the company described as "complex" (a word I like to see only when used to describe the surgical procedures!), fully explains the "miss". Clearly there are several challenges as well, including lower unit demand for new systems and pressure on instrument sales due to the lower initial stocking as well as better inventory management by customers. On the other hand, I found the high international percentage despite currency challenges, the pricing holding up, the compelling features of the new technology and the clinical data to more than make-up for the short-term dampening of demand.
I believe that the stock might run into trouble at 140 or so, if not earlier, but I am even more confident that it will be substantially higher in a few years. As you can see in the chart below, the valuations are relatively low for a high-growth monopoly.
I believe that 90 is very solid entry level should it pull back, but I would buy some in front of that level as well (105-110). I have to confess to making a trading blunder, having sold my position at 114-120 early last week with the hope of repurchasing after they reported or even before if the stock dropped enough. I missed while I was on the call, but I was concerned that the "guidance suspension" could force the stock below 100 briefly. The good news is that it is a large position in my Top 20 model portfolio (which is now up 17% YTD), though I expect to take some off the table there Monday. I continue to believe that no matter how bad this economy is or becomes, ISRG will continue to enjoy the proliferation of its technology. The part that challenges me is how cheap investors may allow the stock to become between now and then. In a "best-case" scenario, I wouldn't be surprised to see the stock trade to 175 by year-end, as this would represent a 25PE on 2010 projected pre-options earnings. In this market, though, best-case scenarios haven't been materializing, so I will be cautious for now.
Disclosure: No position
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