Intuitive Surgical, Inc. (NASDAQ:ISRG) is up on earning as investors seem to like the latest update from the company. Analysts have a lot to say on the latest news – here is a brief summary of what the sell side thinks.
Intuitive Surgical, Inc. (NASDAQ:ISRG) – analysts
ISRG Thesis Update: ISRG prints yet another beat and raise pointing to improving core fundamentals, with procedures continuing to come in strong (we think that ex- extra days, 1Q procedure growth was ~15%, and 2Q came in ~100 bps better at ~16%), and system sales stabilizing. Furthermore, the company continues to leverage complementary revenue opportunities (e.g.: table motion software), which bodes well for upcoming product launches such as the Single Port (Sp) instrument. All in, we contend that investor confidence in ISRG’s ability to drive double-digit revenues in the medium term, which along with operating leverage opportunity and balance sheet deployment should yield mid to high teens EPS growth (with FY17 potentially benefitting another ~4% from adoption of FASB 2016-09). Given the improved visibility and long tail (supported by MDT & JNJ’s view on robotics), we are raising our estimates for FY17 EPS from prior $24.50 to $25.25 and FY18 from $27.50 to $28.65 (ex stock comp). In conjunction, we are raising our PT to $775, with the blended forward premium relative to SP500 in line with recent levels, and reiterate Buy
ISRG’s 2Q results again met or exceeded expectations across all key metrics: (1) procedures meaningfully outperformed; (2) 2Q systems sold met expectations, though with a much better mix of outright capital purchases and a higher percentage of higher ASP dual console Xis; and (3) gross margins at 71.9% represented a 2+ year high watermark. All the above drove a roughly $30M top-line “beat” (5% upside vs. Stifel/consensus) and an impressive, $0.77 or 16% EPS outperformance vs. consensus/Stifel. And, we believe that management’s procedure growth and GM guidance range increases on the 2Q call — which really only capture 1H outperformance — could ultimately prove conservative. Finally, we were encouraged by several of CEO Gary Guthart’s comments on the company’s broad and deep pipeline, which is seemingly gaining clinical momentum. These comments included more granular perspectives on multiple new imaging enhancements, which could be seen in a matter of “quarters”. Also, the Sp platform continues to track on-plan with clinical milestones and management’s confident tone seemed to suggest increased conviction that the new system will not only allow for single port access in existing ISRG indications, but also could target market expanding, new ISRG surgical procedure opportunities. Finally, commentary suggesting ISRG can and will manage different price points on both capital and instruments was heartening particularly in advance of potential future competitive robotic entries over the next several years. We raise our TP to $800 and maintain our Buy rating.
Table motion may be beginning to gather steam for Hill-Rom. Intuitive generated $6mn in revenues from table motion split between upgrades from legacy Xi units and newly placed systems. We believe it costs a hospital ~$140k for table motion, split roughly 50/50 between the software upgrade to Intuitive and the operating table to Hill-Rom, therefore Hill-Rom should also be able to generate ~$6mn in sales. That said, there may be a lag given system sale/upgrade timing pushing sales beyond Hill-Rom’s F3Q. Even a 50% conversion rate ($3mn in sales)would drive 50 bps of corporate sales growth. Table motion sales was one of the drivers of Hill-Rom’s more sustainable sales base, a key contributor to our June 16 upgrade.
ISRG’s results point to continued strong fundamentals. We remain confident that two of ISRG’s most important U.S. procedure growth drivers, colorectal and hernia, are sustainable and that ISRG has a long runway ahead in international markets. While management does not expect material revenue contribution from its Sp platform until 2018, competition from MDT (launch prior to 2019) and Verb Surgical (launch prior to 2020) is still ~18-36 months away. In the meantime, strong fundamentals are allowing ISRG to accelerate investments to drive continued surgical robotics market adoption and bring differentiated next-generation systems and technologies to market sooner.
Intuitive Surgical handily exceeded 2Q expectations, including an eighth consecutive quarter of double-digit procedure growth. Procedures grew an impressive 16% yr/yr (vs our and consensus estimate of 14%), and management again raised its procedure growth outlook for 2016 to 14%-15% (from prior 12%- 14%), suggesting greater confidence in these healthy trends.
• Solid top and bottom line results. ISRG reported revenue of $670 million, $30 million ahead of consensus; adjusted EPS was $5.62, $0.64 above consensus. Favorable gross margin of 72% drove most of the EPS upside; with pro-forma EBIT margins back in the 40% range, ISRG is the most profitable company in MedTech.
With 70% of total revenue being recurring, Intuitive Surgical’s business model is improving even as it invests aggressively to broaden its robotic surgery ecosystem. This juggernaut of a market presence is based on giving surgeons and hospitals what they want: a widely applicable, capable tool set that improves patient outcomes and helps manage costs while improving profitability. While competitors will try to capture surgeon mind share, we believe that will be quite challenging absent a superior and similarly broad product set, which we do not anticipate seeing anytime soon.
What do you think?