UPDATE: Morgan Stanley Downgrades Intuitive Surgical (ISRG) to Underweight

(Updated - July 6, 2015 10:13 AM EDT)

Morgan Stanley downgraded Intuitive Surgical (NASDAQ: ISRG) from Equalweight to Underweight with a price target of $500.00 (from $560.00). Analyst David Lewis said while the opportunity is large, the pace of expansion is slower than Edwards (NYSE: EW) and the price reflects the opportunity.

"We see a 7%+ sales CAGR over the next ten years to drive market expansion to $4.7 billion by 2025, driven by a 10% procedure CAGR partially offset by increased system utilization and system ASP and average procedure revenue declines," Lewis said. "The driver is general surgery which only generated $200 million in I&A revenue in 2014, but we expect its contribution to grow to $1.2 billion by 2025. Superiority to laparoscopy could expand the market to $6bn, reflected in our Bull case, but the recent ROLARR study does not support this conclusion. Intuitive's pipeline system, the Sp, could open up additional procedures and could drive the sales base $480 million higher in 2025, which is reflected in our valuation below."

The analyst went on to say that despite an upper single digit sales CAGR through 2025, limited margin leverage mutes earnings momentum. "Intuitive has the highest high OM/GM ratio in devices even following recent softer top-line growth pressuring operating margins through 2015. Investors largely view this as temporary and consensus models target operating margins above 38% by 2017. Our model also assumes margin expansion, although to a lesser extent than consensus, even with 30-50 bps of annual pressure due to product mix and trade-in headwinds. Intuitive Surgical trades at 26x '16 earnings (31x inc. stock comp) vs. large cap peers at ~17x. It's premium is based on growth, but its earnings may not materially outpace peers. Structural margin pressures will drive earnings growth more inline with sales, materially below Edwards."

For an analyst ratings summary and ratings history on Intuitive Surgical click here. For more ratings news on Intuitive Surgical click here.

Shares of Intuitive Surgical closed at $486.29 yesterday.

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