It's not easy to own a stock that's trading at 39 times its trailing earnings, with little hope of that changing anytime soon. In the case of Intuitive Surgical (Nasdaq:ISRG), the premium may well be worth it. (For related reading, see P/E Ratio.)
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Value Versus Growth, on Steroids
No, Intuitive Surgical certainly isn't a value stock. Competing surgical device and equipment makers like Medtronic (NYSE:MDT) and Zimmer Holdings (NYSE:ZMH) both boast much lower trailing price-to-earnings measures. The former trades at about 12 times its trailing twelve-month earnings, and the latter at around 16 times its trailing income. The industry as a whole is sitting on a P/E of 16.3.
Time to shed ISRG shares then? Were it most other industries with that kind of disparity, the answer would probably be "yes". When it comes to medical and surgical equipment though, what seems like a ridiculous valuation may be far more supported than most investors could ever imagine.
Healthy Track Record
For proof, look no further than Intuitive Surgical's five-year history. Since early 2007, the stock has gained about 390%, yet its trailing twelve-month P/E has been above 26 almost the whole time and has averaged approximately 36 for that span. The only time it dipped below the 26 mark was in early 2009, reaching 17.5 before moving back above 26.0 by the middle of the year. Yet again, the stock soared despite a valuation that would be unpalatable for most other names.
Lesson learned? "Expensive" is a relative term. More important to today's nervous shareholders though, the rather high P/E measure isn't necessarily a reason to bail out. Indeed, there may even be reason for newcomers to step in. (To learn more, read Beware False Signals From The P/E Ratio.)
How to Justify Frothy Valuations
Most stocks can't sustain valuations of more than 30 times their trailing earnings. There's an important lesson from the ones that can, however - they've proven they can innovate and grow earnings (an obvious but still-rare quality), and they've captured the hearts and minds of investors.
Take Amazon.com (Nasdaq:AMZN), for instance - another stock that has averaged an enormously high P/E reading (of above 90) for the past five years, yet it has gained around 346% during that time. The key to Amazon's unlikely stock success was a great underlying story that was more important than the lofty stock price.
The Sky's the Limit for da Vinci Robots
Though Intuitive Surgical doesn't innovate in a way that drives consumers wild - like Amazon has, or Apple (Nasdaq:AAPL) has with its iPad - it is doing so within the medical equipment world. Its da Vinci surgical robots continue to be cleared for more and more uses, with the latest one being gall bladder removal.
Actually, scratch that - the latest use the surgical robot may have is as a way of repairing NASA's satellites. The nation's space agency is looking for ways to make such repairs more cost-feasible, and at less risk to human life. For patients, investors and surgeons (even if on a subconscious level), there's just something cool about the technology good enough to fix satellites also being used to fix people. The unique technology has trumped the high price of the stock. It has for years, in fact, because there's still nothing else quite like it. The fact that the company has grown its bottom line for five straight years - tripling it in the process - doesn't hurt either. Though again, that's an extension of innovation and keeping investors impressed.
So no, don't sweat what seems like a frothy price. For ISRG, it's the norm. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future or Become Your Own Stock Analyst.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, James Brumley did not own shares in any of the companies mentioned in this article.
InvestingHow do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
Stock AnalysisLearn about the top five dividend stocks of companies operating in the health care sector that generate substantial cash flows to afford high payouts.
Stock AnalysisThese three stocks are resilient, fundamentally sound and also pay generous dividends.
Investing NewsAre stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
Investing NewsHere are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
Investing NewsHere are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
Stock AnalysisIf you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
Mutual Funds & ETFsExplore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
Mutual Funds & ETFsLearn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
Investing NewsWill Ferrari's shares move fast off the line only to sputter later?
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
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 >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
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 >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>