What was that? You may not have been in the name. It was very painful if you were in the name. I am referring to Intuitive Surgical, (ISRG). The stock fell 14.34% on Friday and closed the session at $252.34, closing the week at $252.34, which was a decrease of 31.7% from its December highs.
Intuitive Surgical published its first quarter results following Thursday’s closing call. It was also the day that Fed Chair Jerome Powell handed the torch to US financial markets. The adjusted EPS was $1.13, on revenue of $1.49B. Both numbers beat Wall Street’s expectations. The sales number was sufficient to support growth of 15%. Even though $1.49B beat Wall Street’s expectations, there is a noticeable slowdown in growth. Year-over-year revenue growth was 72% in Q2 2021. Quarterly growth was 17%, 30%, and 15.5% respectively for Q3, Q4 & Q1.
Who is Intuitive Surgery?
The short answer is: A company that supplies healthcare equipment and supplies. The longer answer is: The company develops, manufactures and markets the da Vinci surgical and Ion endoluminal systems. These products and the associated services allow physicians and healthcare providers to access minimally-invasive care. The systems include a console, vision system and proprietary instruments. Da Vinci’s five categories include da Vinci surgical system, da Vinci tools and accessories and da Vinci Stapling. The Ion endoluminal systems can be used to diagnose, as well as minimally invasive biopsies of the lungs. The short answer is what you really wanted. Intuitive Surgical can be described as a pioneer in robotic surgery. You got it?
Inside Baseball
Some internals look innocent enough. The number of da Vinci procedures worldwide increased 19% compared to the same quarter a year ago. The firm placed 311 da Vinci Surgical Systems. This is an increase of 4% over Q1 2021. The firm was able grow the da Vinci Surgical System installation base to 6,920, a 13% increase. The firm even increased its 2022 prediction for procedure growth from 11% – 15% to 12% to 16%. Then why the meltdown? On Thursday, the firm spoke out about their inability to satisfy customer demand and “on-time delivery performance” that was quite poor due to constraints on supply chain. The firm then spoke about inflation pressure margins.
The call concluded with management acknowledging that patients continue to delay medical procedures due to the ongoing pandemic. Look around the world and see what’s happening in China. You will find that this is still true globally and that the potential exists for these issues – pandemics and supply chains – to impact normal US operating procedures.
In fact, if we look at the numbers, net income was the lowest in any quarter since Q42020, while GAAP net earnings from operations ($408.1M), were the lowest since the third quarter of 2020.
Broader View
It is ISRG but it isn’t. ISRG lost 9.7% last Friday due to the 14% beating. The S&P Health Care SPDR (XLV) lost 3.58%. Within that sector, the Dow Jones US Medical Equipment Index suffered a 2.98% beat and the Dow Jones US Medical Supplies Index was roasted at 5.65%. ISRG is located in the Dow Jones Medical Equipment Index. If we go back to January 1, ISRG has fallen 29.77% since then, while the Dow Jones Medical Equipment Index has fallen 4.83%. However, the XLV has been supported by Medical Provider and Pharmaceuticals. The Dow Jones US Medical Supplies Index has fallen 12.17% and 12.63% respectively year to date.
Fundamentals
ISRG reported a $1.17 share free cash flow for Q1 2022. This is the lowest since Q32020, but it is still in line with Q4 2020 and Q1 211, so I don’t consider this to be too bad. The firm has a net cash position at $8.401.8B and assets at $9,960.9B. It is therefore very “cashy” heading into possibly troubled waters. Current liabilities are $1,097.1B. The majority of these is in accounts payable. The firm’s current ratio is a very impressive 9.1. This is not only healthy, but mega-healthy.
Let’s continue. The total assets amount $13.678.4B. This includes a very minimal entry for “Goodwill” and no entry at all for “Other Intangibles”, which I love to see. The total liabilities less equity is just $1,521.5B. Guess what? This balance sheet has no debt. There is not a penny. Talk about impressive. This firm is able to pay its bills in the future and doesn’t likely need to tap any debt markets. However it is in excellent shape should the need arise. This balance sheet passes with flying colors the Sarge test. A plus.
My Thoughts
The pandemic has caused serious damage to the company. It is impossible to predict how it will play out or how long it will last. I love how the firm seems to have managed itself. The only thing that I don’t like about this stock is its valuation. A stock that is valued at 51 times forward-looking earnings must show rapid and accelerating growth in sales to maintain such a valuation. These shares are attractive because of their PE numbers and growth numbers.
Readers will notice that ISRG had been in flat basing patterns up until January’s selloff. The shares found support at the current price, retraced approximately 50% of the entire selloff and established a new base with resistance around $309. The stock is a favorite of mine. I do. These shares have been shown by my indicators as being weakened but not technically oversold. In a different setting, I would recommend an incremental entry to this name (okay, I’d do more than advocate). With the valuation that the algorithms will target, I believe I’ll be less risk-averse in this environment.
Idea (minimal lots)
– Write one ISRG April 29, (this Friday) 250 for $5.50
– Buy one ISRG April 29th $240 and get it for around $2.50
Net Credit $3.00
Notes. The trader gets $3 if the share closes at $250 or more on Friday. The trader might have to pay $250 per share (net basis $247), but he or she had to buy protection at $240 in case he or she gets their face ripped off. The maximum loss for Friday would be $7. This idea requires that the trader is comfortable entering the weekend with the shares at a net basis in excess of $247.
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