At first glance, Intuitive Surgical (NASDAQ: ISRG) and Johnson & Johnson (NYSE: JNJ) might seem to have little in common other than they both sell medical instruments. However, Johnson & Johnson could eventually compete against Intuitive Surgical in the surgical robotics market thanks to its Verb Surgical joint venture with Alphabet's Verily Life Sciences.
The main way the two companies compete against each other currently is in the stock market. So far in 2018, Intuitive Surgical is definitely winning the battle, with a year-to-date gain of nearly 50% compared to J&J's single-digit percentage loss. But which of these stocks is the better pick for investors over the long run?
Image source: Getty Images.
The case for Intuitive Surgical
Intuitive Surgical reigns as the undisputed leader in surgical robotics. The company launched the first version of its da Vinci robotic surgical system in 1999 and has rolled out three new generations of the system since then. As of June 30, 2018, Intuitive Surgical claimed 4,666 systems installed throughout the world.
With competition on the way from Medtronic and others, including Verb Surgical, Intuitive Surgical's nearly 20 years in the surgical robotics market should give it a distinct advantage. The company's da Vinci systems have a long track record of safety and performance. And Intuitive has a big customer base of hospitals that won't be likely to want to throw away their investment in their da Vinci systems.
But Intuitive Surgical doesn't just have to play defense. The company has several long-term growth opportunities. Demographic trends should benefit Intuitive tremendously. An increasing number of senior citizens in the U.S. is likely to drive growth in surgical procedures such as prostatectomies that are ideal for robotic surgery.
The U.S. isn't the only country Intuitive Surgical targets, though. International markets present another significant growth opportunity for the company. Intuitive Surgical will also continue to explore other procedures for which robotic surgery can be effective.
Investors should really like that Intuitive Surgical is a cash cow. Recurring revenue from instruments, accessories, and services generated 71% of total revenue in 2017. As more da Vinci systems are installed, this steady source of revenue will grow even larger.
The case for Johnson & Johnson
Johnson & Johnson can't boast of the heady growth numbers that Intuitive Surgical can. But the company does have two clear advantages over Intuitive.
The first is its stability. Johnson & Johnson is a healthcare giant that's been in business since 1886. It's made up of three business segments with more than 260 operating companies across the world. J&J's consumer segment, the company's smallest business unit, made more than four times the revenue last year that Intuitive did.
If Intuitive Surgical is a cash cow, Johnson & Johnson might be described as a cash farm. The company generated leveraged free cash flow of nearly $17.8 billion over the last 12 months. While its consumer and medical device segments contributed significantly to that total, the biggest reason for J&J's strong cash flow is its pharmaceuticals segment.
One benefit to Johnson & Johnson's financial flexibility is that it can make pretty much any acquisition it wants. The company made a big one last year with its purchase of Swiss drugmaker Actelion. That deal played a key factor in J&J posting double-digit percentage revenue growth in its second-quarter results announced in July.
The second advantage that Johnson & Johnson has over Intuitive Surgical is also directly related to its strong cash flow. J&J offers one of the more attractive dividends in the healthcare sector. Its yield of 2.68% is good. The company's dividend track record is even better. J&J has increased its dividend for an impressive 56 consecutive years.
Which of these two stocks is the better pick? I think it depends on what kind of investor you are.
If you're primarily seeking income, Johnson & Johnson is definitely the better pick. The stock has long been a staple for retirees, for example, because of its solid, dependable dividend. On the other hand, if you're looking for growth, Intuitive Surgical is likely more up your alley. I don't see J&J coming even close to delivering the kind of growth that Intuitive can.
The bottom line, in my view, is that both of these are good picks for investors. I lean toward growth stocks, so my preference is Intuitive Surgical -- despite its relatively high valuation. However, I'm also bullish about J&J over the long run.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Speights owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Intuitive Surgical. The Motley Fool owns shares of Johnson & Johnson and Medtronic and has the following options: short October 2018 $135 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.