Intuitive Surgical Hits a Bump

 | Mar 05, 2013 | 5:00 PM EST
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In the last week, shares of Intuitive Surgical (ISRG) have been surgically removing profits from investors' portfolios. After an upbeat earnings report in late January, the shares rocketed higher, only to be slapped down by news of an FDA investigation and a negative article in a medical journal. 

And of course, whenever a favorite son of the Street takes a beating, the analyst community can be counted on to support the stock. Analysts dismissed any concerns and re-initiated higher price targets. But in my experience, battered momentum names usually underperform until they get their sea legs back. In the short term, Intuitive Surgical will go lower before it goes higher.

Toward the end of January, Intuitive Surgical reported fourth-quarter earnings per share of $4.25, $0.23 better than the consensus estimate. Revenue rose 22.6% to $609.03 million. Fourth-quarter sales of instruments and accessories increased 29% to $254 million. The company sold 175 da Vinci Surgical Systems, compared with 152 systems in the same period last year. System revenue rose 18% to $265 million. Since more surgical systems are out there, surgical procedures rose 25%.

On the conference call, management forecasted fiscal year 2013 revenue growth between 16% and 19%, which works out to about $2.56 billion in revenue. Procedures are expected to grow by 20% to 23%. The company also forecasted continued strong sales of accessories and consumables. In 2012, 450,000 surgeries were performed with the da Vinci system.

The good news sent the stock higher, but a report by Bloomberg on March 1 sent the shares lower. Bloomberg reported that the FDA has asked surgeons at key hospitals to list the complications they may have seen using the machines. The surgeons were also asked to discuss their training. The FDA also asked what types of surgeries the da Vinci System is best and least suited for.

According to Bloomberg, the FDA is trying to figure out why there is an increase in the number of incident reports. Is the rise in incident reports a "true reflection of problems," or are has the number of incident reports increased simply because the company has sold so many more systems and the number of procedures has soared over the last several years?

The bears piled on with a report from the Journal of the American Medical Association that said there is little difference in patient outcome between using the da Vinci system compared and using regular surgical procedures. The article concluded that the da Vinci wasn't worth the additional $2,189 surgical cost. The bears also have been circulating copies of a lawsuit that claims that the company's aggressive sales practices endanger patient safety. Let's face it -- they don't hire a bunch of choirboys to sell a $1.4 million piece of equipment.  

While the lawsuit may or may not have merit, I'm more concerned with slowing revenue growth. According to Thomson One/First Call, consensus revenue is expected to slow from 34% in 2010 to 17% in 2013 and about 15.5% by 2014. In other words, in the span of four years, revenue growth is expected to slow more than 50%.

Although I would expect revenue to slow as the law of large numbers begins to take hold, I don't think many investors anticipated the da Vinci market becoming so saturated so quickly. You saw what happened to Apple (AAPL) once investor sentiment turned against it. The stock aggressively declined as investors pulled in their horns. I think this is a similar situation. Intuitive Surgical has had 30% drops before, and the stock could easily decline into the seasonally soft first quarter as investors re-think their commitment to the stock.

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