Surgically Removing Profits

 | Jul 09, 2013 | 10:00 AM EDT  | Comments
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After the close, Intuitive Surgical (ISRG) preannounced disappointing earnings. The company said second quarter revenue would be $575 million vs. expectations of $629.8 million. Investors freaked out and the stock sold off sharply.

This shouldn't be a surprise. In my last article, I predicted that sales from the da Vinci Surgical System would slow.

If you recall, the first quarter was a total disaster as well. This quarter, the company generated sales of $215 million from sales of 143 da Vinci systems. Last year, the company managed to sell 150 units and pulled in a healthy $229 million. Hospitals are cutting costs and slower growth in gynecologic procedures was to blame for the slowdown.

The da Vinci surgical system is currently in use by over 1,300 hospitals, but the Food and Drug Administration has been investigating incident reports of patient injuries. 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 has the number increased simply because the company has sold so many more systems and the number of procedures has soared over the last several years?

The company said it would report net income of $160 million compared to analyst estimates of $178.4 million.

Although the stock is down about 9% in the last year, I believe there is further downside. Growth has slowed dramatically. In fiscal 2010, the company grew revenue 34% and by 2014, the Street is estimating just 14% growth. That 14% looks to get cut when Monday's earnings miss is calculated. A 60% slowdown in revenue is unlikely to keep the growth stock crowd interested.

To me, Intuitive Surgical is way overpriced. For fiscal 2014, analysts are estimating something like $20.56 in earnings. But that's too high. That number will get cut. If you give the company a rich 20 multiple, you are only looking at a stock that's worth a maximum of $400. At today's price, that means there is more than 20% downside from here. But, in reality, the stock should trade back down to $329 -- the place from which it took off in 2011. If I'm right, there is about 35% downside.

I think Institutive Surgical will keep removing investors' profits.

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