Currently ISRG holds ~$3 Billion in cash and short term securities yielding ~0.5% interest. This is about $4 million per year. They will redeploy this asset to "invest" in ISRG stock, which currently at an E/P (earnings to price yields about 4%. Since there are no tax effects for long term shareholders, it can be considered a net margin increase of ~3.5% of $1B= $35M or ~$1 a share after tax earnings (assuming they can buy back around 2 million shares). If the P/E is 25 as it currently is, the market should compensate the price by adding $35M / 38M shares * 25 =$23 per share.
To be complete you must consider the long term growth of the company over the next 5-10 years, I will assume for conservative purposes earnings will increase 10% annually. Hence 4% becomes 10.4%, 11.4%, 12.6%, ....22.3%, 24.5% over the next 10 years. From these sustitute earnings you must subtract the "guaranteed 0.5% interest. That is an immediate ~8 fold return on investment and grows to ~50 fold in year ten. The reduction of shares by 2 million (~5% outstanding) will mean the long term impact of less shares should, all else being equal, return ever increasing benefits to the remaining long term stock holder commensurate with the earnings growth above. By year 10 the $23 dollar per share should grow to $240M / 50M shares * 16P/E= $77 per share.
Assumptions for Year 10:
1)10% growth in earnings per year minus the 0.5% cash return (24.5%-0.5%=24.0%)
2)Continues stock option grants of 0.5% per year or ~10 million shares 40M+10M= 50M
3)Reduction of P/E commensurate with reduced long term growth prospects P/E = growth * 6 (statistical estmate of appropriate P/E) 10%+6=16 P/E
Sorry if I became too wonkish. This is how the market (theortically) should view the announcement. Hence the ~$20 pop yesterday and the "$20-30 share price increase" expected WSJ
Oh, I would add I think we have not seen the pop stick around yet because of op-expiration. I think things will move starting next week and we will see a run into earnings. If I see any hint of a run I will be buying calls.