Another earnings report, another blowout quarter for Intuitive Surgical Inc. (NASDAQ: ISRG), the maker of the da Vinci robotic surgical system. Intuitive Surgical reported last Wednesday and the stock jumped Thursday and Friday on the news while analysts were busy revising their projections for future earnings and upgrading their recommendations and price projections (see: Chasing Value: The amazing Intuitive Surgical).I have been one of Intuitive's biggest cheerleaders for years and like everyone else was encouraged to find the company still growing successfully on all fronts. Given my favorable opinion of the company, and the stock, I took a look at where it stood after the run-up (closing Friday at $222.53) to see whether there might be any value left, or if the frenetic buying had exhausted the possibility.
"Too late. Done. You missed the move, move on" was how Jim Cramer characterized ISRG stock Friday, much like when he was down on the stock $80 ago. I fervently disagreed back then, but I might agree with him today.
During my jubilant period, ISRG was trading at a P/E ratio from 15 to 25, but today the trailing figure is 43, while the best guess projection looking forward is 36. Even the strong earnings report does not support a P/E of 40 to me.
The 52-week high is $332.80 and the stock's all time high is a hair under $360, but those were times of more rapid growth and a topped out stock market. I think the stock will return there some day but would be surprised if that day came soon without a major improvement in the global economy.
On the positive side, the company is another cash flow machine and has no long-term or short-term debt, with ROE, ROA and ROIC in the high teens. It is also running net profit margins of 24%.
Returning to the negatives, I frown on companies with high price-to-cash-flow ratios and ISRG is sporting a 5.8 figure, which is over three times what I would normally like to see. ISRG does not pay a dividend, and it is not likely to do so in the foreseeable future. Among my stock holdings almost everything pays some dividend. The other exception that comes to mind is Berkshire Hathaway (NYSE: BRK.A and BRK.B), but I have been more than willing to let 'my pal Warren' keep the change and make a few of my investment decisions.
Timing the market is a fool's game and few investors have proven to own any crystal balls. I think that investors have clearly jumped all over this stock, fearing the train was leaving the station without them. That has caused it to be propelled beyond any value that I can see. On the other hand, no one can say that it will not go higher, in particular if traders covering their short positions run for the hills.
The best thing I can recommend to anyone wanting to own this stock is to dollar cost average into it over the next year, perhaps buying shares every other month. I do think the stock will be higher in a year's time, but I do not think it is going straight up. Still, long term, ISRG could be double in five years or it could even be acquired. And while the stock competes for your investment dollar, I do not believe it is going to see any significant competition in its business.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of ISRG.
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Reader Comments (Page 1 of 1)
7-27-2009 @ 6:16PM
Ali said...
So much personal information for an investor who's been following this stock for some time. The PE information is a common sense one and not a determinant to invest. I would have appreciated some more company projections, economic fitting, and international growth type of opinions. Lacking this information, I neither would listen to Cramer nor to you on investing a penny in this company.
7-28-2009 @ 7:59AM
Sheldon L said...
Ali,
Thanks for taking the time to point out this posts deficiencies. This post is part of a continuing dialog over the past three years. I hope you continue to follow the investing journey. I tend to write in a conversational style. I am not on Wall Street nor am I a journalist. You can find the facts you seek from any financial site.
7-30-2009 @ 8:21PM
Beltway Greg said...
Ali, if you ever get the chance to sit down and talk to a successful investor, one who has been in the game for more than just a few years I suggest you jump at the chance. The great thing about Sheldon and some of the other bloggers on Blogging Stocks or say some of the folks on "Fraud Money" is that they let you into their minds, i.e., the psyche of the investor which as you are well aware drives the market on many occasions. I once wrote that I can put numbers into any forward looking equation and create a reality albeit a false reality. (Tech stocks 98-2000 ring any bells?) Why are some successful at this endeavor while others are doomed to fail? Intelligence? No, I believe the two biggest components of stock market success are experience/historical knowledge, and discipline/rationality. The ability to manage risk on the fly helps also but I'll lump that one in with discipline. Of the two if you don't have discipline you'll go down the tubes quickly. Recently, I took a call from a young friend, 20something, I'm 48 who calls on occasion to bounce ideas off of me. He told me he was trading GM. I told him to get out immediately. I told him that he might make some money but if he kept taking risks of this type he would eventually lose his shirt. He called me again one afternoon not so long ago and asked me why GM no longer was trading and was displaying a price but no volume? Essentially, the party was over and he crapped out. There are plenty of numbers in this post. Obviously, Sheldon relies on p/e (in this instance) and didn't go into how much they make on each machine and how much they might make if each hospital if forced to buy/upgrade more machines (saturation rate) and how many da Vinci's are sold internationally. Also, they make money off of the servicing of the devices. With international sales you have to start looking at exchange rates. It get complicated real quick. Or, you can rely on technical indicators. Is the stock going up on higher volume and is it becoming more profitable? Very Investor's Business Daily. Yet, go back a year later and see which stocks IBD put in one of their lists and see how successful they were and very quickly you'll see the limits of technical analysis. For every Green Mountain Coffee you'll have some unknown company which fell off of the charts never to be heard from again for some very human non-technical reason.
And as far as listening to Sheldon well, I questioned his sanity on this stock about 100 points ago. Not really his sanity but for my investing style, there are just too many unknowns and the moves are dramatic. I tend to stay away from stocks like ISRG, FSLR, GOOG, anything that may bounce 20 points quickly except of course when I might short ISRG tomorrow at the open say, 100 shares, for lunch money. Hey, daddy needs to pay for his frappacinos. Also, that Todd Harrison character at Minyanville seems to have his crap wired too.
Other than the Ben Graham bible, you might want to check-out A Mathematician Plays the Stock Market/John Allan Paulos, Hedgehogging/Barton Biggs/ A Demon of our Own Design/Richard Bookstaber, Wealth, War, & Wisdom/Barton Biggs. Also, there's a great series on PBS "The Ascent of Money" Niall Ferguson.