Intuitive Surgical (NASDAQ:ISRG) makes the da Vinci comprehensive surgical-aide system – it’s installed 1,752 so far — used in urology, gynecology, cardiothoracic surgery, trans-oral surgery, and general surgery.  The company also produces shareholder wealth – in the last decade, its stock has soared more than 2,000%. After releasing a strong second-quarter earnings report Tuesday, the stock rose another 7.7%. Can the run continue?

Here are three reasons it might make sense to buy this stock:

• Great earnings reports. Intuitive Surgical has been able to surpass analysts’ in all of its last six earnings reports.
• It is out-earning its cost of capital.  The company is earning more than its cost of capital – and it’s improving. It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In the first half 2011, Intuitive Surgical’s EVA momentum was 5%, based on first six months’ 2010 annualized revenue of $1.35 billion, and EVA that rose from $147 million annualizing the first six months of 2010 to $271 million annualizing the first six months of 2011, using a 9% weighted average cost of capital.
• Rapid growth and strengthening balance sheet. Intuitive Surgical has grown very quickly. Its revenue has soared
  at an average rate of 44.1% over the last five years and its net income has risen at a 32.3% annual rate over that period. It has no debt and its cash has risen at 39.5% annual rate from $240 million (2009) to $910 million (2010).

One reason to avoid this stock is its price. Intuitive Surgical’s price-to-earnings-to-growth ratio of 2.19 (where a PEG of 1.0 is considered fairly priced) means its stock is very expensive. Medco’s P/E is 37.3 and its earnings are expected to grow 17% to $13.06 a share in 2012.

This is a great company and its stock could be a helpful addition in your portfolio – if you just can’t wait to own it, you are taking
the risk that you will overpay.  I would look to buy shares on a market dip.

Peter Cohan has no financial interest in the securities mentioned.