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Intuitive Surgical: A Market Leader for the Future.

Opdateret: 30. okt.

Intuitive Surgical is a market leader in the surgical industry, boasting an impressive market share of 80% 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, it will be difficult to impede the growth of this company. 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 but have previously held shares in Johnson & Johnson. 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.

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 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 their commercial offering to include diagnostics as well. Hospitals can purchase the system outright, or they can choose to lease it from Intuitive Surgical. Most hospitals are purchasing the systems. In the second quarter of 2022, 42% of the da Vinci systems sold were leased, while 44% of the total Ion Endoluminal Systems are also leased. Intuitive Surgical also generates revenue by selling instruments and accessories, as well as servicing the systems. The average selling price of the da Vinci system in the second quarter of 2022 was $1,5 million. 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 switching a moat.

Their 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), whichdeveloped 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. inengineering from the University of California, Berkeley and later earned an M.S. and a Ph.D. in Engineering Sciencefrom the California Institute of Technology. Besides being the CEO and a member of the Board of Directors at Intuitive Surgical, he also serves 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 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 the fact that he is more interested in the company moving forward than in advancing his own career, 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 are, you can have a look at "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 delivered 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 ROIC decreased slightly in 2022, as we have faced numerous macroeconomic challenges during that year. Despite this, Intuitive Surgery still managed to achievea ROIC above 10%. I really like companies that consistently deliver a ROIC above 10%.

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 actualnumbers and the percentage growth year over year. There have been a few years along the way when the equity of Intuitive Surgical has decreased, but it is hardly anything to worry about. Since 2017, Intuitive Surgical has consistently grown its equity and achieved a record high equity in 2019, which was surpassed in 2020 and further exceeded in 2021.Equity decreased slightly in 2022, but I'm not worried as this decline can be attributed to macroeconomic challenges. Moreover, it is still significantly higher than the figures we observed prior to 2021.

Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Intuitive Surgical has delivered positive free cash flow every year in the last 10 years, and it has grown year over year since 2017 until 2022. There are reasons for the decline in 2022. Again, macroeconomic conditions affected their business, but Intuitive Surgery has also invested in increasing ownership in the supply chain. Management has mentioned that 2022 was more capital-intensive compared to previous years. However, this is expected to lead tohigher industrial dependability, a more robust supply chain, and lower production costs. A great move from management,in my opinion.

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.However, it is not possible to calculate the debt in Intuitive Surgical, as they have no debt. Obviously, it is something I really like.

Like every other investment, there are risks associated with investing in Intuitive Surgical. One issue is the shortage in the supply chain. While Intuitive Surgery has made investments in its supply chain, it still faces significant risks. In the past,supply chain shortages have prevented Intuitive Surgery from fulfilling all of its orders. Furthermore, supply chain shortages have resulted in higher component costs. This, combined with increased logistic costs and a stronger U.S. dollar, has led to a decrease in the gross profit margin from 69,3 % in 2021 to 67,4 % in 2022. Additionally, the operating margin decreased from 31,7 % in 2021 to 24,1 % in 2022. When margins decrease, it hurts profitability. Management believes that the supply chain will be volatile for some time. Another risk is macroeconomics. Management mentioned that higher inflation, higher interest rates, and staffing shortages have led to increased financial pressures on hospitals. It means that hospitals are lowering their capital investment plans and tightening their operational budgets. An investment in a da Vinci system is not inexpensive, and given the current macroeconomic conditions, it could result in decreased sales for Intuitive Surgical. Finally, new competition is entering the sector. Intuitive Surgical holds a significant market share in a rapidly growingsector. It gives them an advantage, but now large companies are entering the market. Companies like Johnson & Johnson,with Ottava, and Medtronic, with Hugo, are betting on robotic surgery as a future growth catalyst. They possesstechnological and financial resources that surpass those of any competitor that Intuitive Surgical has encountered.Furthermore, local Chinese competitors have entered the Chinese market, which is a significant market for Intuitive Surgical. Intuitive Surgical has a strong competitive advantage, making it unlikely for these companies to attract current customers. However, they may pose a challenge in acquiring future customers.

There is also a lot of potential for Intuitive Surgical moving forward. One is sector growth. The global surgical robots market size was valued at $3,6 billion in 2021. However, the sector is expected to grow at a compound annual growth rate (CAGR) of 18% until 2030. Intuitive Surgical is the clear market leader in the sector and is projected to capture a significant portion of that growth in the future. Minimally invasive surgery cuts costs. While the shock in macroeconomic conditions might deter hospitals from initiallyinvesting 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 found some interesting findings. It was found that minimally invasive surgery demonstrated lower healthcare expenditures ranging from $2.300 and $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. While hospitals become more efficient by utilizing minimally invasive surgery, which results in reducedlabor costs. Growing Internationally. In 2022, there was a 16% growth in procedures in the United States, while procedures outside of the United States grew by 22%, despite the lockdown in China, which is their second-largest market. It shows that procedures are growing post-COVID, which should increase demand for Intuitive Surgical's products. Furthermore, they delivered more da Vinci systems to Europe and Japan in the fourth quarter of 2022 compared to the fourth quarter of 2021. They would have done the same in China if it weren't for the lockdowns. Furthermore, the Ion Endoluminal System is currently undergoing regulatory review in Europe, South Korea, and China. Management expects clearance in Europe in 2023, while they do not provide a specific forecast for South Korea and China. If it gets approved, it will lead to additional growth.

All right, we have gone through the numbers, potential and risk regarding Intuitive Surgical, and now it is time for us to calculate a price for Intuitive Surgical. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS of 3,65, which is from 2022. I chose an estimated future EPS growth rate of 15% (the analysts'expected growth rate is 22% at Finbox). I also selected an estimated future PE of 30, which is double the growth rate, as the historically PE for Intuitive Surgery has been higher. Additionally, we have already established a minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $109,50. 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 $54,75 (or lower, obviously) if we use the Margin of Safety price.

Our second way to calculate a buy price is the Ten Cap price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating cash flow last year was 1.490,8. The capital expenditures were 532,4. I tried to look through their annual report to see how much of the capital expenditures were used for maintenance. I couldn't find it, but as a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 372,68 in our further calculations. The tax provision was 262,4. We have 350 outstanding shares. Hence, the calculation will be as follows: (1.490 - 372,68 + 262,4) / 350 x 10 = $39,42 in Ten Cap price.

The last calculation is the Payback Time. I also described in "MY STRATEGY". With Intuitive Surgical's Free Cash Flow Per Share at 2,71 and a growth rate of 15%, if you want to recoup your purchase in 8 years, the Payback Time price is $42,78.

I believe that Intuitive Surgical is a highly intriguing company. They have a significant market share in a rapidly growingmarket that is expected to continue expanding for many years. I believe that most hospitals will prioritize long-term investment in minimally invasive surgery. This approach not only reduces costs for hospitals, but it is also likely to be requested by insurance companies and patients, as it also reduces costs for them. Nonetheless, I think macroeconomics will affect Intuitive Surgical in the short term, while I'm less concerned about the long term. The same goes for supply chain shortages that will normalize over time. However, I believe that the competition will be different from what we have seen before, given the entry of these large companies into the market. Thus, competition is a long-term risk that one needs to be aware of. Nevertheless, I really like the company and its management. The historical numbers also indicatesthat Intuitive Surgical is a great company with a management team that knows how to execute. I may have been too conservative in my calculations using the 2022 numbers, which was a challenging year. Thus, I don't think that Intuitive Surgical will ever trade at any of the calculations I made. I will probably open a position in Intuitive Surgical if it reachesthe intrinsic value within the Margin of Safety price of $109,50.

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