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32% Drop Enough To Make Intuitive Surgical A Buy?

Dee Gill

Intuitive Surgical (ISRG) showed a keen confidence in itself recently by doubling down and speeding up a share repurchase program as its share price wallowed in very low territory. But investors looking for a value play in the dominant stock of robotic surgery might want to wait for a better opening.

ISRG Chart

Intuitive’s announcement to double its repurchase program to $1.5 billion was meant to buck up the share price, which has been falling amid questions about the safety and cost efficiency of its da Vinci robotic surgery system. The announcement included a promise to repurchase and retire about $500 million in shares from Goldman Sachs (GS), mostly over a two-week period.

Although Intuitive’s share price remains some 30% below February levels, their valuation still mimics a company with a sharp up-angled growth line ahead of it. Intuitive trades at a forward PE ratio of about 22 even though analysts expect essentially flat earnings this year.

ISRG Forward PE Ratio Chart

This large valuation was key to several recent downgrades by analysts that believe in the company’s long-term potential but struggle with how to value it in the short term. Analysts’ forecasts are based on a lot of unknowns at the moment, and there are several issues that might yet knock down the share price and valuations further. The company’s forward price-to-sales ratio is still almost 7.

ISRG Price / Sales Ratio TTM Chart

The company has warned that a decline in hysterectomies generally will continue to depress new system sales this year, as that procedure is one of the most popular with da Vinci. More interest in other types of procedures is supposed to make up the losses, and there will be disappointment if it doesn’t. Also, regulators are looking into reports of adverse outcomes of some da Vinci surgeries, which leaves the shares exposed to any damning news from that investigation. Similarly, a success for a plaintiff in any of the ongoing malpractice suits involving the systems could seriously depress sales as well as suck a lot of cash from the company. Any further study questioning the rationality of paying for da Vinci instead of traditional laparoscopy likely would hurt shareholders.

Although the flip side of any of those scenarios would likely give the shares a boost, these are issues unlikely to be resolved with a single event. An endorsement from a medical specialty would help, for example, but it won’t eliminate the problem of selling expensive procedures to a country widely focused on cutting healthcare costs.

Still, most industry analysts believe robotic surgery will eventually prevail over the old fashioned variety, and Intuitive has a deep and wide moat around this business. They see Intuitive as the only player in what will, some day, be a fast growing market again. But there may be better opportunities to find bargains in these shares in what’s likely to be a long slog up to that day.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.

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