It wasn't so long ago that Intuitive Surgical (Nasdaq:ISRG) was one of the cleanest growth stories in med-tech, as hospitals seemingly couldn't buy the company's surgical robots fast enough. Not only did Intuitive's daVinci robot come to all but dominate the prostatectomy market, but it was well on its way to taking significant share in hysterectomy as well. Then the bad news began. From reports of surgical complications to multiple papers alleging that robotic surgery is not cost-effective, the news flow turned decidedly negative even as procedure counts continued to grow. Now we have a major quarterly earnings miss to digest. While there are enough rumblings out there to suggest that it's not a solely Intuitive-specific issue and the procedure growth numbers still look decent, it looks this highly-valued stock is going back into the penalty box. I do believe Intuitive continues to offer above-average growth in the med-tech space, though, and the reality is that this stock only seems to get cheap when the news flow gets pretty scary. A Big Miss For Q2, But Maybe Not Where You'd ExpectIntuitive Surgical doesn't miss very often, so the company's warning that second quarter earnings would significantly miss expectations is rare enough all on its own. Against an average estimate of about $630 million, Intuitive management is calling for $575 million in revenue in the quarter – a 9% miss that is also about 6% below the lowest estimate on the Street. Although the company didn't give EPS guidance, the net income number would suggest an EPS miss of similar magnitude assuming that the company didn't repurchase a huge number of shares during the quarter. So what happened? On first blush, it's tempting to think that Intuitive is finally falling victim to all of the bad press. The combination of more conservative prostate cancer management and the growth of new drugs like Johnson & Johnson's (NYSE:JNJ) Zytiga and Medivation's (Nasdaq:MDVN) Xtandi has been reducing prostatectomy volumes, and it sounds as though more conservative management is coming into vogue for hysterectomy cases as well. Couple that with a steady drumbeat of negative press about robot-assisted surgical complications and the cost-benefit of these procedures, and maybe hospitals are easing back on the reins. I don't know about that. Although instrument/accessory growth of 18% suggests some softness in procedure volumes, it's not nearly enough to account for the miss. On the other hand, US system placements plunged almost 30% to 90 (against an expectation of about 120 to 125) and total system placements declined (from 150 last year to 143) for the first time since the miserable capital equipment market of 2009. SEE: A Checklist For Successful Medical Technology InvestmentIs Intuitive Surgical No Longer Special?That there is pressure in the med-tech cap-ex space is not exactly news. Radiation oncology Varian (NYSE:VAR) has been seeing iffy order patterns, and other vendors of permanent (or semi-permanent) equipment like General Electric (NYSE:GE), Philips (NYSE:PHG), and CareFusion (NYSE:CFN) have been getting more cautious. What is news is that it's impacting Intuitive Surgical – a company that heretofore often seemed impervious to the economic conditions that affect demand for hospital cap-ex. But it may also not be an “either or” situation. As prostatectomy and hysterectomy volumes weaken, hospital administrators are likely not seeing nearly so much pressure to buy additional units. Likewise, pushback from payors may be leading hospitals to take more of a “start slow and go from there” approach with new units – making sure that a new daVinci system is fully utilized before shelling out the $1.5 million-plus for a new system. The Bottom LineIntuitive's stock is getting hammered today, but it won't really be clear what's going on in the market until we hear from others in the space like Stryker (NYSE: SYK) and Covidien (NYSE:COV) and get a better sense of what is going in terms of surgery volumes, cap-ex, and so on. What's more, even with this expected decline it is not as though Intuitive will look cheap by traditional metrics like EV/EBTIDA or P/E. All of that said, more risk-tolerant investors who've been waiting for a chance to get into Intuitive shares may welcome this opportunity. I continue to believe that the Intuitive platform offers a compelling proposition for doing procedures on a minimally-invasive basis that would otherwise have to be done as open surgeries, with the attendant risks, pain, side-effects and so on. Accordingly, I think that so long as the utilization numbers hold up, this is a stock worth considering on weakness.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center