Intuitive Surgical (ISRG) Management Could Be Setting Estimates Too High -Barron's

According to an article published in this weekend's edition of Barron's, shares of Intuitive Surgical (Nasdaq: ISRG) could be overvalued at current levels. After reporting solid Q2 earnings on Tuesday of last week, Intuitive's stock jumped more than $50 the next day but has since traded down to around $315.

Comparing management's estimates with estimates obtained from his own research, the author of the article, Bill Alpert, who recently underwent surgery with Intuitive's da Vinci robot system, comes up a little short in hitting the companies expectations. Specifically, Intuitive has baked into its estimates 3 systems each at the largest 1,000 hospitals, 1 da Vinci each at the next 1,000 largest hospitals and about 2,000 systems purchased around the remainder of the world, bringing a total of 6,000 robots sold worldwide. With Intuitive indicating that it has sold 946 robots through June, management believes the product has only penetrated about 15% of the market.

Mr. Alpert's estimates, however, point to a much less optimistic outlook: he believes estimates are too high and points out that the current average is only about 1.3 robots per hospital, versus the company's goal of 3 robots per hospital. Further, the Barron's writer seems concerned that hospitals could keep 6,000 da Vinci systems busy. With sales primarily coming from consumables and service contracts, Intuitive estimates that each robot could bring in $573,000 annually, implying $3.4 billion in recurring revenue a year. Based on today's rates, this amount of revenue would imply 5 procedures a week per robot, which is much higher than today's average of 3 procedures a week per robot.

Alpert said, "Adding up the various kinds of procedures that Intuitive is currently targeting in the U.S., a very generous total might come to half a million da Vinci surgeries a year. That's far below the 1.5 million implied by the bullish model."

Intuitive Surgical, Inc., together with its subsidiaries, engages in the design, manufacture, and marketing of da Vinci surgical systems for use in urologic, cardiothoracic, gynecologic, and general surgeries.

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