Wait for a Pullback Before Buying ISRG

by Dan Burrows | January 24, 2013 12:19 pm

Ordinarily, the stock of a company with a $23 billion market cap and a $580-and-change share price wouldn’t bounce around too much. But then, not every company has the same challenges — and opportunities — as Intuitive Surgical (NASDAQ:ISRG[1]).

ISRG dominates the industry when it comes to robotic-assisted surgery on soft tissue procedures. The company’s da Vinci Surgical System allows surgeons to perform minimally invasive procedures for things like prostatectomies and hysterectomies. Since the machine offers a steadier and more delicate touch than the human hand alone, postoperative outcomes are superior to traditional surgical procedures.

At a time when robots are increasingly displacing good old-fashioned human beings everywhere, from flying the skies to behind the wheel to the factory floor, it’s nice to see a machine complementing — rather than replacing — skilled labor.

But that’s not what’s been driving — and often knocking down — the stock, all while taking investors on a nerve-wracking ride.

Intuitive Surgical shares jumped more than 9% Wednesday and gained another 3% in early Thursday trading after the company blew past Wall Street’s fourth-quarter profit and sales estimates.

The thing is, the company always beats on bottom- and top-line results — ISRG has topped expectations for at least nine straight quarters now. But that hasn’t kept shares from carving out a roller-coaster ride of ups and downs.

Just have a look at the 52-week performance, courtesy of YCharts[2], below:


From $440 to $588 to $472 to $551 … eesh. ISRG has been as good as a 33% gainer and as weak as a 7% gainer over the course of the year.

But — importantly — it never was in the red and never trailed the broader market over that span. ISRG was up nearly 18% for the trailing 52 weeks before it received the big post-earnings pop, beating the S&P 500 by about 4 percentage points. The current rally has shares looking at a 31% gain over the last 12 months.

A big knock on ISRG has been that so much of its international growth comes from Europe. With much of the continent in recession, revenue from the region developed a nasty habit of failing to deliver on expectations.

Happily for Intuitive Surgical — and the Street — domestic demand and other key international markets more than took up the slack in the final quarter of the year.

As Lawrence Keusch, an analyst at Raymond James (NYSE:RJF[4]), wrote in a note to clients:

“General surgical procedures are gaining traction, Japan is growing rapidly and the U.S. remains robust. We believe that 2013 guidance has room to the upside.”

But that doesn’t mean investors should initiate positions here — not after the stock has tacked on 15% in less than four sessions.

True, shares still appear to offer compelling valuations by forward and trailing earnings. Even after a huge rally since Jan. 18, the stock still trades at steep discounts to its own five-year-average forward and trailing price-to-earnings ratios.

However, with a forward P/E of almost 29, ISRG is still very much priced for hot growth, meaning the next misstep will once again clobber the stock (see the chart above). And that will present a better entry point.

Also, bear in mind that at least some of this incredible rally is no doubt due to short covering — 7% of the float was sold short as of Dec. 31. Between the short squeeze running its course and a history of share-price volatility, a cheaper price on ISRG shouldn’t be too long in the offing.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

  1. ISRG: http://studio-5.financialcontent.com/investplace/quote?Symbol=ISRG
  2. YCharts: http://ycharts.com/
  3. [Image]: https://investorplace.com/wp-content/uploads/2013/01/ISRG-chart.jpg
  4. RJF: http://studio-5.financialcontent.com/investplace/quote?Symbol=RJF

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