We maintain our Neutral recommendation for Intuitive Surgical (ISRG). The company reported third quarter adjusted earnings per share of $4.46 surpassing the Zacks Consensus Estimate of $3.48. Intuitive stated revenues of $537.8 million, up about 20% year over year, beating the Zacks Consensus Estimate of $535 million.

Revenues from instruments and accessories were $218 million in the third quarter, up 24% year over year. Procedure growth was about 22% in the third quarter. The rise in general and gynecological procedures in the domestic market was partly offset by reduced growth in Europe and a fall in prostatectomy procedures in the U.S.

Systems revenues came in at $232 million in the third quarter, up 17% year over year. The growth was driven by higher sales of da Vinci systems. Intuitive noted that 155 da Vinci Surgical Systems were sold in the quarter, compared with 133 systems in the year-ago quarter.

Service revenues rose 22% year over year to $88 million, aided by an increase in the installed base of da Vinci systems.

For 2012, revenues are forecast to grow in the range of 21.5% to 23% compared with the earlier guidance of 20% to 23%. Operating income is expected at about 40% compared to approximately 39% to 40% of net sales earlier.  The company updated its procedure growth at 24% (earlier in the band of 25% and 27%) for 2012.

We expect a number of procedures that are currently completed either in an open surgical manner or with laparoscopy to be eventually replaced by da Vinci surgery, as robotic surgery becomes the standard of care in many instances. The company enjoys a virtual monopoly in robotic surgery with little competition.

Intuitive's recurring revenue stream continues to be robust and provides a shield against cyclicality of revenues arising from the sale of discretionary capital equipment to hospitals. However, we believe that until the global economy fully recovers, the stock may come under pressure as investors ponder whether lingering macro economic uncertainty weakens hospitals' commitment towards investment in high-cost robotic systems.

The pace of adoption of robotic surgery may therefore be lumpy and growth in usage requires acceptance from patients and training for medical practitioners. Intuitive competes with Accuray Incorporated (ARAY) in certain niches.

We prefer to remain on the sidelines partly due to high valuation, which factors in the attractive growth prospects of the company, despite the da Vinci system's status as a leading enabler of robotic minimally invasive surgery. Our Neutral recommendation is supported by a short-term Zacks #3 Rank (Hold).
 
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Tickers in this Article: ISRG, ARAY

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