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Intuitive Surgical: A Market Leader for the Future.

Opdateret: for 1 dag siden

Intuitive Surgical is a market leader in the surgical industry, boasting an impressive 80% market share in a rapidly expanding market. Their business strategy is to create value for patients, surgeons, and hospitals alike. If they can successfully deliver on this strategy, impeding the growth of this company will be challenging. However, it doesn't necessarily mean that you should buy the stock. In this analysis, I will investigate whether Intuitive Surgical is a good investment and determine its fair value.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly go through why the company has meaning to me. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in Intuitive Surgical. If you would like to copy my portfolio or see the stock in my portfolio, you can read about how to do so here. I don't own shares in any of their competitors either. Intuitive Surgical has been on my watchlist for years, meaning that I'm interested in the company. Nevertheless, I will keep this analysis unbiased as always. If you want to buy share or fractional shares in Intuitive Surgical, you can do so at eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

Intuitive Surgical was founded in 1995 in California, United States. The company develops, manufactures, and markets robotic products designed to enhance clinical outcomes for patients through minimally invasive surgery. They are mostly known for their da Vinci system, which enables surgeons to perform operations while comfortably seated at an ergonomic console, viewing a 3DHD image of the surgical field. It means that the patients are not operated on by a robot alone, but rather by a robot that is controlled by a surgeon. The advantage of this system is that it provides surgeons with additional arms and avoids exposing them to positions that may lead to fatigue. In 2019, Intuitive Surgical launched the Ion Endoluminal System, which enables minimally invasive lung biopsies. Intuitive Surgical has expanded its commercial offerings to include diagnostics as well. Hospitals can either purchase the system outright or choose to lease it from Intuitive Surgical. By the end of 2023, Intuitive Surgical had an installed base of 8.606 da Vinci surgical systems, including 5.111 in the U.S., 1.617 in Europe, 1.484 in Asia, and 394 in the rest of the world. Additionally, there was an installed base of 534 Ion systems, with 531 located in the U.S. The da Vinci surgical system generally sells for between $0,7 million and $2,5 million, while the Ion system generally sells for between $500.000 and $650.000. Once a system is sold or leased, Intuitive Surgical enters into service contracts with hospitals at an annual fee ranging between $80.000 and $200.000 for the da Vinci surgical system, and between $55.000 and $65.000 for the Ion system. It means that recurring revenue represented 83% of the total revenue in 2023. The high cost of a system and the time required for surgeons to learn how to use it make it unlikely for a hospital to switch to another system. Hence, Intuitive Surgical has a strong competitive advantage in terms of a switching moat.

The CEO is Gary S. Guthart. He joined Intuitive Surgical in 1996 and held various positions until he became the CEO in 2010. Before joining Intuitive Surgical, he was part of SRI International (formerly Stanford Research Center), which developed foundational technology for computer-enhanced surgery. He also has experience from a Human Factors Lab at NASA, where he was part of a team that studied the human performance assessment of pilots. He has a B.S. in engineering from the University of California, Berkeley and later earned an M.S. and a Ph.D. in Engineering Science from the California Institute of Technology. Besides serving as the CEO and a member of the Board of Directors at Intuitive Surgical, he also sits on the Board of Directors at Illumina and the Silicon Valley Leadership Group. Interestingly, he stated in an interview that he didn't and still doesn't have a burning desire to be a CEO, but he was handpicked for the role by former CEO Lonnie Smith. Instead of aspiring to be the CEO, Gary S. Guthart simply admired the direction that Intuitive Surgical was heading in, and it continues to inspire him to this day. According to Comparably, Gary S. Guthart has an employee rating that places him in the top 5% of similar-sized companies. This indicates that he is well-liked by his employees. If you had invested in Intuitive Surgical when Gary S. Guthart became CEO, you would have gained more than 600%. I believe that his results, employee ratings, and his focus on the company's progress rather than his own career advancement all indicate that he is a great CEO.

I believe that Intuitive Surgical has a switching moat. Furthermore, I feel very confident in the management. Now, let us examine the numbers to determine if Intuitive Surgical meets our criteria for having a strong competitive advantage. In case you want an explanation about what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first number I will investigate is the return on invested capital, also known as ROIC. Ideally, you would like to see a return on invested capital (ROIC) above 10% in all years. Intuitive Surgical has maintained a return on invested capital (ROIC) above 10% for each of the past 10 years. Even in the very challenging pandemic year of 2020, Intuitive Surgical managed to deliver a return on invested capital (ROIC) above 10%. Seeing numbers like these makes me very confident, as Intuitive Surgical consistently delivers year after year. I'm not concerned that Intuitive Surgical hasn't managed to reach the same heights as before the pandemic, as most companies have been affected by macroeconomic factors in the past few years. Despite this, Intuitive Surgical still managed to deliver a Return on Invested Capital (ROIC) above 10%. Overall, I am encouraged by these numbers.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. There have been a few years when the equity of Intuitive Surgical has decreased, but it is hardly anything to worry about. Since 2017, Intuitive Surgical has consistently increased its equity, reaching a record high in 2019, which was surpassed in 2020 and further exceeded in 2021. Although equity decreased slightly in 2022, this decline can be attributed to macroeconomic challenges. However, I am not worried as Intuitive Surgical managed to increase its equity again in 2023, reaching a new all-time high.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Intuitive Surgical has generated positive free cash flow every year over the past 10 years. The company has shown year-over-year growth from 2017 to 2022, despite macroeconomic factors impacting its free cash flow. However, Intuitive Surgical experienced its lowest free cash flow since 2017. Free cash flow decreased further in 2023, reaching its lowest level since 2015, which is not encouraging. Levered free cash flow margin has also significantly decreased in the past two years and reached its lowest level in a decade in 2023, which is concerning. The free cash flow yield is currently at its lowest level, indicating that the stock is trading at a high valuation. However, we will revisit this later in the analysis.

Another important aspect to investigate is a company's debt. We need to determine if the business has a manageable level of debt that can be repaid within a 3-year period. This can be assessed by calculating the long-term debt to earnings ratio. However, it is not possible to calculate the debt of Intuitive Surgical because they have no debt. Intuitive Surgical has not had any debt in the past twenty years. Therefore, debt will likely never be a concern when investing in Intuitive Surgical.

Investing in Intuitive Surgical carries risks, like any other investment. One risk is competition. Intuitive Surgical holds a significant market share in a rapidly growing sector. It gives them an advantage, but now large companies are entering the market. Companies such as Johnson & Johnson, with Ottava, and Medtronic, with Hugo, are banking on robotic surgery as a future growth catalyst. They possess technological and financial resources that surpass those of any competitor that Intuitive Surgical has encountered, and Medtronic's Hugo system is approximately 20%-25% cheaper than Intuitive Surgical's da Vinci system. Local Chinese competitors have entered the Chinese market, which is a significant market for Intuitive Surgical. Intuitive Surgical has also mentioned that third-party service providers, servicing da Vinci surgical systems and Ion endoluminal system operators, may emerge and compete with Intuitive Surgical based on price or offerings. Macroeconomics. Management has mentioned that macroeconomic factors, such as high inflation and high interest rates, have led to increased financial pressures on hospitals. This indicates that hospitals are reducing their capital investment plans and tightening their operational budgets. An investment in a da Vinci system is not inexpensive, and if these macroeconomic conditions continue, it will affect the business of Intuitive Surgical. Furthermore, continued inflationary pressures will affect aspects of Intuitive Surgical's business where revenue streams and cost commitments are linked to contractual agreements that extend further into the future. They may not be able to quickly or easily adjust pricing, reduce costs, or implement countermeasures. A higher inflationary environment can also negatively impact raw material, component, and logistics costs, which, in turn, may increase the costs of producing and distributing products. Global trends may reduce demand for their products. There are several global trends that could affect Intuitive Surgical in the future. One significant development is the introduction of obesity therapies such as GLP-1. GLP-1 drugs for weight loss have already captured some market share from bariatric surgeries. Management has noted a continued slowdown in the growth of bariatric surgeries throughout 2023, likely due to the increasing use of GLP-1 drugs for obesity treatment. Bariatric surgeries currently account for only 4% to 5% of Intuitive Surgical's total global procedures. However, there may be other trends in the future that reduce the demand for its products. For instance, the rapid decline in smoking rates in many countries, and the consequent drop in lung cancer incidence, may reduce the demand for Intuitive Surgical's Ion endoluminal system in the future.

There is also a lot of potential for Intuitive Surgical moving forward. Minimally invasive surgery reduces costs. While the shock in macroeconomic conditions might deter hospitals from initially investing in robotic surgical systems, the trend could change once hospitals begin to prioritize long-term cost-cutting. A recently published research report that studied 10.000 adult patients between 2013 and 2018 and compared open (without robots) and minimally invasive (with robots) surgery revealed some interesting findings. It was found that minimally invasive surgery demonstrated lower healthcare expenditures ranging from $2.300 to $8.100. The lower healthcare expenditures were divided between patients and hospitals. Patients spent less time in the hospital and were also less likely to be readmitted. Hospitals are becoming more efficient by utilizing minimally invasive surgery, which results in reduced labor costs. Increasing placements and utilization. Placements refer to sold or leased Intuitive Surgical systems, and this trend continues to grow. Intuitive Surgical installed 1.313 multi-port systems in the full year of 2023, compared to 1.241 multi-port systems in 2022. Ion placements for the year were 213 compared to 192 in the previous year. Utilization of Intuitive Surgical's products is an important indicator of customer health because it is correlated to patient demand, care team satisfaction, and hospital financial health. System utilization, defined as procedures per installed clinical system per quarter, grew by 9% globally year-over-year for Intuitive Surgical's multi-port platform, reaching a new high as customers adopt a broad mix of procedures on their systems. Sector growth. The surgical robots market is projected to reach $25.47 billion by 2030, with a compound annual growth rate (CAGR) of 15.4% from 2023 to 2030. The increasing demand for robotic surgery is driven by the growing elderly population and a shift towards value-based healthcare, which aims to enhance surgical outcomes for patients. This is pushing for the development of less invasive procedures and the enhancement of technology for robotic surgical systems. Management has noticed the increasing demand and believes there is a substantial and durable opportunity to fundamentally improve surgery and acute interventions. They aim to deliver products that provide better outcomes, enhance patient experiences, improve care team experiences, and reduce the total cost to treat per patient.

Now it is time to calculate the share price of Intuitive Surgical. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 5,03, which is from the year 2023. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 18,9% in the next five years., but 15% is the highest I use. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Intuitive Surgical's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $150,90. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Intuitive Surgical at a price of $75,45 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.814, and capital expenditures were 1.064. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 745 in our calculations. The tax provision was 142. We have 352,3 outstanding shares. Hence, the calculation will be as follows: (1.814 – 745 + 142) / 352,3 x 10 = $34,37 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Intuitive Surgical's free cash flow per share at $2,13 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $33,62.

I believe that Intuitive Surgical is an intriguing company. They have a significant market share in a rapidly growing market that is expected to continue expanding for many years. I like the management as well. Intuitive Surgical is facing new competition from larger competitors than before, which needs to be monitored to determine if Intuitive Surgical can maintain its significant market share. Macroeconomic factors affect Intuitive Surgical, which is evident when looking at the free cash flow over the past two years. The economy will eventually improve, and I would like to see higher numbers than what Intuitive Surgical has delivered in the past two years. New global trends may affect the demand for Intuitive Surgical products in the future, which is another aspect to monitor. Intuitive Surgical is operating in a growing sector and is producing products that are expected to benefit from this growth. Intuitive Surgical's products reduce costs, leading to increasing placement and utilization. Consequently, the company's high-margin recurring service revenue is expected to grow. Intuitive Surgical has recently introduced the da Vinci 5, which could potentially increase sales as the economy improves. There are many things to like about Intuitive Surgical, but as the free cash flow is decreasing, I will not be interested in purchasing shares unless they reach $150, which is the intrinsic value of the Margin of Safety price.

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