Intuitive Surgical Inc. (NASD: ISRG)

Transcription

1 Aug 26, 2016 Intuitive Surgical Inc. (NASD: ISRG) $ USD ( As of 08/25/16 ) Data Overview Target Price $ Week High-Low $ $ Day Average Volume 174,794 Beta 0.73 Market Cap B Dividend / Div Yld $0.00 / 0.00% Industry MED INSTRUMENTS Industry Rank 73 / 265 (Top 28%) Current Ratio 5.78 Debt/Capital 0.00% Net Margin 26.80% Price/Book (P/B) 5.09 Price/Cash Flow (P/CF) Earnings Yield 2.63% Summary Zacks Rank 2-Buy Style:Value: Growth: Momentum: VGM: Intuitive Surgical reported impressive second quarter 2016 results. However, management s guidance for the second half of the year disappointed us. Procedure growth is expected to slow down, due to anticipated lower contribution from mature procedures (Urology and Gynaecology). Gross margin is also forecasted to decline in the back half. Moreover, higher spending on product development can weigh on margin in the near term. Nevertheless, we believe incremental spending on product development and higher investment on expanding the company s footprint in international markets (particularly in Europe) are prudent moves that will drive longterm growth. Further, growing adoption of the da Vinci system among physicians for general surgery and thoracic procedures is a key growth catalyst. Moreover, the integrated Table Motion product has gained significant traction within a short span of time, which will boost top-line growth. Elements of the Zacks Rank Agreement Estimate Revisions (60 days) Debt/Equity 0.00 Value Score 100% 100% 100% 100% P/E (F1) P/E (F1) Rel to Industry PEG Ratio 3.35 Q1 (Current Qtr) Revisions: 2 Up: 0 Down: 2 Q2 (Next Qtr) Revisions: 2 Up: 0 Down: 2 F1 (Current Year) Revisions: 2 Up: 2 Down: 0 F2 (Next Year) Revisions: 3 Up: 3 Down: 0 P/S (F1) 9.97 P/S (TTM) Magnitude Consensus Estimate Trend (60 days) P/CFO P/CFO Rel to Industry EV/EDITDA Annual Growth Score Proj. EPS Growth (F1/F0) 20.75% Hist. EPS Growth (Q0/Q-1) Current Q1-2.03% Current Q2-2.81% Current F % Current F % Qtr CFO Growth Yr CFO Growth Upside Zacks Consensus Estimate vs. Most Accurate Estimate Return on Equity (ROE) 12.18% (NI - CFO) / Total Assets Asset Turnover 0.44 Most Accurate: 4.35 Most Accurate: 5.19 Most Accurate: Most Accurate: Momentum Score 1 week Volume change % Zacks Consensus: 4.35 Q1 0.00% Zacks Consensus: 5.19 Q2 0.00% Zacks Consensus: F1 0.00% Zacks Consensus: F2 0.00% 1 week Price Cng Rel to Industry 1.13% (F1) EPS Est 1 week change 0.00% Surprise Reported Earnings History (F1) EPS Est 4 week change 0.00% (F1) EPS Est 12 week change 1.98% (Q1) EPS Est 1 week change 0.00% Reported: 4.86 Estimate: 4.21 Reported: 3.67 Estimate: 3.46 Reported: 5.18 Estimate: 4.11 Reported: 4.50 Estimate: 3.61 Average 4 Qtr Surprise Q End 06/16 Q End 03/16 Q End 12/15 Q End 09/ Zacks Investment Research, All Rights Reserved 10 S. Riverside Plaza Suite 1600 Chicago, IL 60606

2 The data on the front page and all the charts in the report represent market data as of 08/25/16, while the reports text is as of 08/26/2016 Overview Headquartered Sunnyvale, CA, Intuitive Surgical Inc (ISRG) designs, manufactures and markets the da Vinci surgical system and related instruments and accessories, which is an advanced robot-assisted surgical system. The surgical system comprises a surgeon s console, patient-side cart, 3-D vision system, da Vinci Skills Simulator and Firefly Fluorescence Imaging. The da Vinci surgical system translates a surgeon s natural hand movements on instrument controls at a console into corresponding micro-movements of instruments positioned inside the patient through small puncture incisions, or ports. The system enhances a surgeon s intuitive control, wrist movements and fine tissue manipulation capability. The system provides 3-D High Definition vision, which helps surgeons gain superior visual clarity of target tissue and anatomy. To date, the company has commercialized four generations of da Vinci surgical systems, namely, da Vinci standard (1999), da Vinci S (2006), da Vinci Si (2009) and da Vinci Xi (Apr 2014). Accessories available with da Vinci surgical systems are EndoWrist Instruments, da Vinci Single-Site, Single-Site needle driver product, EndoWrist One Vessel Sealer, EndoWrist Stapler 45 Instrument and Accessory products. Intuitive Surgical reported revenues of $2.38 billion in full-year Zacks Equity Research: ISRG Page 2 of 8

3 Reasons To Buy: Growing adoption of the company s da Vinci system, increasing procedure volumes, continuous innovation, recurring revenue base and new approvals from the FDA are key positives. Intuitive Surgical s da Vinci surgical system enables minimally invasive surgery that helps overcome the trauma faced by patients in open surgery. Minimally invasive surgery is becoming increasingly popular as it helps patients recover faster, thereby reducing hospitalization costs. Although high price of the da Vinci system may hinder its widespread adoption, we believe that the overwhelming benefits of minimally invasive surgery will compel surgeons and patients to use the system. This will drive the company s system sales thereby improving top-line growth in the long run. In 2015, worldwide procedure growth was approximately 14%. U.S. procedures grew approximately 11%, while international procedures increased approximately 26%. For 2016, the company has strong growth opportunities in the U.S. general surgery market particularly driven by procedures for hernia repair and colorectal surgery. Internationally, the company has signficant growth opportunities in Japan and China. Intuitive Surgical keeps innovating new technologies for its surgical systems. In 2015, the company added 45 millimeter Xi stapler and Harmonic Curved Shears and a second set of instruments. Recently, FDA approved Integrated Table Motion, which is a combination of da Vinci Xi and Trumpf Medical s TruSystem 7000dV, a sophisticated operating table. The combination is expected to help surgeons and anaesthesiologists make essential table adjustments in order to execute surgeries in an efficient manner. The most recent approvals of da Vinci Xi Single-Site instruments and accessories and da Vinci Xi EndoWrist Stapler 30 (30mm) instruments and reloads expand the capabilities of the system. The Single-Site technology helps surgeons operate through a single incision in the patient s umbilicus during cholecystectomy, benign hysterectomy and salpingo-oophorectomy procedures. This in turn leads to an almost scar-less surgery. The newly approved curved and straight tip instruments and four reloads will significantly expand the company s portfolio of EndoWrist Stapler. The Stapler 30 Curved-Tip instrument can be used for General Surgery, Thoracic, Gynecologic and Urologic surgery. The new product assists the surgical procedures by allowing superior placement and visualization around tenuous vasculature. We believe this new additions will drive penetration into the minimally invasive surgery market over the long term. Intuitive Surgical s business model ensures that it continues to generate revenues following the initial sale of the da Vinci surgical system. Recurring revenues, as a proportion of total revenues (70% in 2015, up 11%) continue to grow at a much higher rate as compared with system sales. This ensures a regular stream of income even in testing times. Moreover, Intuitive Surgical operates in a niche market with no direct competition, which is a major positive in our view. Intuitive Surgical has the ability to leverage investor return via share repurchase and dividends. The company s board of directors authorized a $1 billion share repurchase program in Jan During 2015, the company repurchased approximately 366K shares for $184 million. The suspension of the medical device tax for the next two years is expected to drive gross margin growth. In 2015, the tax lowered Intuitive Surgical's gross margin by almost 70 bps. Risks Intuitive Surgical faces the risk of adoption of its procedures. Adoption growth takes time, as each procedure needs to gain credibility. Furthermore, broad use of the company s products requires training of surgical teams. Market acceptance could be delayed by the time required to complete such training. The da Vinci Surgical System has a long sale and purchase order cycle as it is a major capital investment for hospitals that requires the approval of senior management at purchasing institutions. The time lag may act against the interests of the company. Foreign exchange movements are impacting the company s results. Though Intuitive Surgical generates a major portion of its revenues from the domestic market, continued investments in international businesses are widening the company s exposure to international markets. Hence, unfavorable foreign exchange remains a major concern for Intuitive Surgical faces the risk of lower capital spending by hospitals particularly during the current changes emanating from healthcare reform in the U.S. and austerity measures in Europe. Thus, a major source of risk is pricing pressure. Austerity measures in Europe have targeted hospital capital expenditure as a source of cost savings. In the U.K., the budget has shifted the focus from capital expenditures to operations in order to protect health benefits. European customers are therefore expected to gravitate toward low-end systems. Further, healthcare reform-oriented reimbursement pressure would negatively affect Intuitive Surgical. Last Earnings Report Intuitive Surgical posted adjusted earnings of $5.62 per share in the second quarter of 2016, up 23% on a year-over-year basis on significant revenue growth and margin expansion. Including stock-based compensation, adjusted earnings came in at $4.86 per share, which crushed the Zacks Consensus Estimate by $0.65 and surged 28.3% from the year-ago quarter. Quarter Ending 06/2016 Report Date Jul 19, 2016 Sales Surprise 4.19% EPS Surprise 15.44% Zacks Equity Research: ISRG Page 3 of 8

4 Revenues increased 14.3% year over year to $670.1 million, driven by higher procedural volume and growth across all segments. Revenues were higher than the Zacks Consensus Estimate of $643 million as well. Recurring revenues totaled $447 million, representing almost 75% of the revenues in the quarter. Quarterly EPS 4.86 Annual EPS (TTM) Procedure Details Worldwide da Vinci procedure volumes grew approximately 16% year over year to 176K. Procedures in the U.S. grew approximately 13%, while that outside the U.S. increased about 25%. Increasing adoption in general surgery procedures in the U.S., continued growth in urology procedures worldwide and modest growth in the U.S. urology and gynecology drove the procedure growth in the quarter. Management stated that under the general surgery, inguinal hernia repair and ventral hernia repair growth remains strong, while growth in colorectal surgery was solid. Procedure growth was variable by country in Europe; with strong performance in Germany offsetting a slight sequential decline in the U.K. Procedure growth improved modestly, both in the Nordic countries and France. In Asia, procedure growth in Japan was solid while growth in Korea was robust and accelerated sequentially. Growth in procedures in China was also strong in the reported quarter. Instruments and Accessories revenues grew 14.3% to $339.3 million in the quarter driven by a higher number of procedures. Revenues realized per procedure were approximately $1,810 which decreased slightly on a sequential basis. System sales increased 15.2% to $202.7 million driven by higher revenues from operating lease activities as well as system average selling price (ASP). Intuitive Surgical placed 130 systems in the quarter, up from 118 in the year-ago quarter. Management at Intuitive Surgical noted that 15 systems were placed under operating lease transactions in the second quarter, compared with 19 in the first quarter, and 5 systems in the year-ago quarter. At the end of the second quarter, there were 66 systems out in the field under operating leases. Intuitive Surgical generated approximately $4 million of revenue associated with operating leases in the reported quarter, compared with $1 million in the year-ago quarter, and $4 million in the first quarter The company also generated almost $13 million of revenues from lease buyouts compared with $6 million in the first quarter, and $4 million in the year-ago quarter. Globally, system average selling price (ASP) increased to $1.56 million, almost $60,000 higher than the year-ago quarter ASP. The year-over-year growth primarily reflects a higher mix of dual console systems and sales of Table Motion. Outside the U.S., the company placed 51 systems compared with 46 systems in the year-ago quarter and 36 systems in the first quarter. The company noted that 22 were placed in Europe, 4 in China, and 13 in Japan. Service revenues were up 13.1% to $128.1 million on growth in the installed base of da Vinci Surgical systems. Margin Details Adjusted gross margin expanded 410 basis points (bps) to 70.6% in the reported quarter buoyed by lower product and product repair costs, improved manufacturing efficiencies and favorable revenue mix. Adjusted operating margin expanded 610 bps to 38% owing to lower selling, general & administrative expenses (SG&A), which as a percentage of revenues, decreased 240 bps on a year-over-year basis. Research & development (R&D) expenses, as a percentage of revenues, also decreased 30 bps. Balance Sheet Intuitive Surgical had cash, cash equivalents and investments of $4.2 billion as of Jun 30, 2016, as compared with $3.8 billion as of Mar 31, Guidance Intuitive Surgical now forecasts 2016 procedural volumes in the range of 14% to 15%, up from the earlier guided range of 12% to 14%. However, the company expects procedure growth to slow down in the second half of Intuitive Surgical noted that its da Vinci Sp (Single port) program is progressing as planned. Management expects first markets for the device to include head and neck surgery, urology and colorectal surgery. The company now expects fewer lease buyouts and lower upgrade and other system revenue in the third and fourth quarter as Zacks Equity Research: ISRG Page 4 of 8

5 compared to the second quarter. Second half 2016 system ASPs will likely be lower than the second quarter driven by product and channel mix. Management expects 2016 gross margin in the range of 70% to 71%, up from the previously guided range of 69% to 70%. However, gross margin is expected to decline in the second half of Further, the company anticipates a 12% to 15% year-over-year increase in operating expenses in 2016, as the company continues to invest in robotic assisted surgery. Recent News On Aug 16, Intuitive Surgical announced the succesful completion of a multi-institutional robot-assisted ventral hernia study. This study was conducted at four medical institutions for 368 patients by five surgeons using da Vinci Surgical Systems. On Aug 1, Intuitive Surgical entered into a joint development program with Dextera Surgical. Under the terms of the agreement, Intuitive Surgical will be responsible for the development work on the new robotic stapler products of da Vinci surgical system and Dextera Surgical will be responsible for the development work on the stapler cartridge. On Jun 13, Intuitive Surgical inked a strategic partnership with telehealth network and managed services provider InTouch Health. Under the terms of the agreement, the da-vinci maker will not only invest in InTouch but will also jointly develop patient informatics solutions for surgical systems. Valuation The Value section of the Industry Comparisons table below provides all the key valuation metrics for Intuitive Surgical contrasted with its nearest peers as well as the industry and the S&P 500 index. Please note that the Zacks Value Style Score condenses all of these valuation metrics into one score that provides a true measure of the stock s intrinsic value. A Value Style Score of A (or B ) is highly desirable, particularly when accompanied with Zacks Rank #1 (Strong Buy) or Zacks Rank # 2 (Buy). The target price of $ is based on 42.7x the Zacks Consensus Estimate for F1 earnings. Zacks Equity Research: ISRG Page 5 of 8

6 Industry Analysis Zacks Industry Rank: 73 / 265 (Top 28%) Top Peers ABIOMED INC (ABMD) ANGIODYNAMICS (ANGO) ACCURAY INC (ARAY) ALPHATEC HLDGS (ATEC) AVINGER INC (AVGR) ACCELERATE DIAG (AXDX) NATUS MEDICAL (BABY) BIOSIG TECHNLGS (BSGM) CONFORMIS INC (CFMS) Industry Comparison Med Instruments Position in Industry: 5 of 80 Industry Peers ISRG Market Cap B # of Analysts 16 Dividend Yield 0.00% Growth Score Hist. EPS Growth (3-5 yrs) 20.75% Proj. EPS Growth (F1/F0) 9.82% Curr. Cash Flow Growth 22.54% Hist. Cash Flow Growth (3-5 yrs) 10.88% Current Ratio 5.78 Debt/Capital 0.00% Net Margin 26.80% Return on Equity 12.18% Sales/Assets 0.44 Proj. Sales Growth (F1/F0) 11.16% Value Score Cash/Price EV/EBITDA PEG Ratio 3.35 Price/Book (P/B) 5.09 Price/Cash Flow (P/CF) P/E (F1) Price/Sales (P/S) 9.97 Earnings Yield 2.63% Debt/Equity 0.00 Cash Flow ($/share) Momentum Score Daily Price Chg -1.49% 1 Week Price Chg 1.13% 4 Week Price Chg 0.37% 12 Week Price Chg 7.51% 52 Week Price Chg 34.84% 20 Day Average Volume 181,560 (F1) EPS Est Wkly Chg 0.00% (F1) EPS Est Mthly Chg 0.00% (F1) EPS Est Qtrly Chg 1.98% (Q1) EPS Est Mthly Chg 0.00% X Industry S&P M B % 1.74% % 7.73% 11.89% 7.07% 9.50% 4.40% 8.05% 8.09% % 41.52% % 9.52% % 16.13% % 2.71% % 5.22% % -0.47% 0.11% 0.00% 0.00% 0.37% 0.00% 3.37% % 12.26% 175, % 0.00% 0.00% -0.01% 0.00% 0.89% 0.00% -0.34% ABMD ANGO ARAY 5.05 B M M % 0.00% 0.00% % 3.82% -2.48% % 12.50% 51.46% 34.71% 8.62% 60.94% 38.25% % 52.96% 54.51% 10.44% NA % 17.17% 73.21% 11.75% % -5.55% 9.69% 4.16% % % 1.21% 5.19% -3.03% -1.38% -1.87% -2.76% 3.74% 7.61% 1.23% -0.60% -4.03% 15.57% 35.61% -5.24% 20.67% 11.49% % 435, , , % 0.00% % 3.46% 0.00% -1,100.00% 3.46% -5.62% -1,100.00% 0.00% 0.00% % Zacks Equity Research: ISRG Page 6 of 8

7 Zacks Rank Education The Zacks Rank is calculated from four primary inputs: Agreement, Magnitude, Upside and Surprise. Agreement This is the extent which brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of estimates being revised higher, the better the score for this component. For example, if there were 10 estimate revisions over the last 60 days, with 8 of those revisions up, and the other 2 down, then the agreement factor would be 80% positive. If, however, 8 were to the downside with only 2 of them up, then the agreement factor would be 80% negative. The higher the percentage of agreement the better. Magnitude This is a measure based on the size of the recent change in the current consensus estimates. The Zacks Rank looks at the magnitude of these changes over the last 60 days. In the chart to the right, the display shows the consensus estimate from 60-days ago, 30-days ago, 7-days ago, and the most current estimate The difference between the current estimate and the estimate from 60-days ago is displayed as a percentage. A larger positive percentage increase will score better on this component. Upside This is the difference between the most accurate estimate, as calculated by Zacks, and the consensus estimate. For example, a stock with a consensus estimate of $1.00, and a most accurate estimate of $1.05 will have an upside factor of 5%. This is not an indication of how much a stock will go up or down. Instead, it's a measure of the difference between these two estimates. This is particularly useful near earnings season as a positive upside percentage can be used to help predict a future surprise. Surprise The Zacks Rank also factors in the last few quarters of earnings surprises. Companies that have positively surprised in the recent past have a tendency of positively surprising again in the future (or missing if they recently missed). A stock with a recent track record of positive surprises will score better on this factor than a stock with a history of negative surprises. These stocks will have a greater likelihood of positively surprising again. Zacks Style Score Education The Zacks Style Score is as a complementary indicator to the Zacks Rank, giving investors a way to focus on the best Zacks Rank stocks that best fit their own stock picking preferences. Academic research has proven that stocks with the best Growth, Value, and Momentum characteristics outperform the market. The Zacks Style Scores rate stocks on each of these individual styles and assigns a rating of A, B, C, D and F. An A, is better than a B; a B is better than a C; and so on. Value Score Growth Score Momentum Score VGM Score As an investor, you want to buy stocks with the highest probability of success. That means buying stocks with a Zacks Rank #1 or #2, Strong Buy or Buy, which also has a Style Score of an A or a B. Zacks Equity Research: ISRG Page 7 of 8

8 Disclosures The analysts contributing to this report do not hold any shares of this stock. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts' personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. Zacks Equity Research: ISRG Page 8 of 8