Jefferies Equity analysts Imron Zafar, Raj Denhoy and Anthony Petrone rate Intuitive Surgical, Inc. (NASDAQ:ISRG) as a Buy as they provide an updated look at recent hospital/surgeon checks, as well as an updated forecast.

Intuitive Surgical

While Intuitive Surgical, Inc. (NASDAQ:ISRG)’s last week’s 4Q preannouncement offered some comfort around da Vinci market dynamics, initial 2014 guidance upcoming on Thursday’s 4Q call will meaningfully impact investor sentiment. To provide some framework, we present recent hospital/surgeon checks and updated forecasts.

Intuitive Surgical, Inc. (NASDAQ:ISRG): Updating model to reflect latest checks and 4Q pre-announcement

Our recent checks to gauge prevailing and expected market dynamics in robotic surgery include feedback from 50 U.S. hospital CEOs/CFOs and 25 U.S. urologists. Key takeaways, coupled with what we gleaned from preliminary 4Q results, are reflected in our updated model and include the following: (1) US gynecology: benign hysterectomy remains the biggest wildcard to overall da Vinci utilization, and volumes do not appear to have deteriorated meaningfully further in Intuitive Surgical, Inc. (NASDAQ:ISRG)’s 4Q to the extent many had feared, and utilization may have bottomed; our outlook is largely unchanged; (2) US urology: volumes trended weaker than expected in 4Q and surgeon checks point to continued pressure in 2014; our model now assumes US prostatectomy volumes declining 3% versus +3% previously; (3) US general surgery: growth remains robust and momentum in cholecystectomy and colorectal looks sustainable; our outlook is intact; (4) US da Vinci capital sales: 4Q US placements were meaningfully below our model and survey data point to continued capex pressures in 2014; we have tempered our outlook for placements, though we were encouraged by planned capital investments at several hospitals surveyed; and (5) Japan: market development continues, with another bolus of placements in 4Q and feedback from Japanese clinicians supporting our growth outlook.

Intuitive Surgical, Inc. (NASDAQ:ISRG) Upcoming 2014 guidance: procedure growth will be in focus

Accounting for all of this, we have updated our model and now project 2014 worldwide procedure growth of 14%, down from 17% based primarily on a more tempered outlook for urology. We believe this forecast is roughly in line with consensus volume growth of around 13% to 14%, and our sense is that buy-side expectations are somewhat lower. Given the near-term uncertainties and a typically conservative management team, we look for initial procedure growth guidance to come in below consensus and in the form of a fairly wide range.

Valuation/Risks for Intuitive Surgical, Inc. (NASDAQ:ISRG)

Our $480 PT for Intuitive Surgical, Inc. (NASDAQ:ISRG) assumes the stock continues to trade at the recent 24x FTM multiple and is supported by DCF. Risks include further deterioration in hysterectomy, adoption in  general surgery, and competition.