Earnings Preview: Intuitive Surgical (ISRG)

Intuitive Surgical (ISRG) is slated to report its second quarter results on Wednesday, July 21, 2010. The current Zacks Consensus Estimate for the second quarter is $2.04, representing a 25.7% annualized growth.

First Quarter Recap

Intuitive Surgical reported first quarter fiscal 2010 earnings per share of $2.12, beating the Zacks Consensus Estimate of $1.66 and the year-ago earnings of $1.02. Total sales shot up 74.4% year over year to $328.6 million. Growth was driven by the continued robotic procedure adoption and higher da Vinci Surgical System sales.

Systems revenues leaped 123.5% year over year, driven by higher sales of 104 systems. Demand for the more recent da Vinci Si system remained robust, with 80 Si placements, or 77% of new system installations versus 79% in the first quarter of 2009.

Instruments and accessories revenues soared 54.1% year over year to $122.7 million, primarily driven by a growth in da Vinci surgical procedures. Services sales spiked up 28.8% year over year to $50.6 million.

Intuitive ended the first quarter with a gross margin of 73.2%, an increase of 490 basis points (bps) year over year. Higher gross margin was partially due to an increased system average selling prices (ASPs).

Estimate Revision Trend

The overall trend in estimate revisions for the second quarter has been static over the past 7 and 30 days. Of the 13 analysts covering the stock, none changed their quarterly or annual estimates over the same periods. Similar trend applies to the estimates for fiscal 2010.

Magnitude

The magnitude of revisions for the forthcoming quarter has hit a plateau over the last 7 days. However, there has been an increase of 1 cent over the past 30 days and 2 cents over the last 60 days. Estimates for 2010 have remained static over the past week and were up 3 cents over both the last 30 and 60 days.

Intuitive Surgical has generated positive surprises in each of the previous four quarters, and we expect the same trend to continue. The operator produced an average positive earnings surprise of 20.6% over the previous four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

Our Take

We expect a large number of procedures that are currently completed either in an open surgical manner or with laparoscopy to be replaced by da Vinci surgery, as robotic surgery becomes the standard of care in many instances. The company enjoys a virtual monopoly in robotic surgery with little competition.

We believe that the growth story at Intuitive Surgical continues to thrive as it develops new products. However, the company’s growth remains contingent on further recovery in hospital capital spending budgets and the continued adoption of robotic procedures. The company’s recurring revenue stream continues to grow and provides a shield against cyclicality of revenues, arising from the sale of discretionary capital equipment to hospitals.

Intuitive Surgical is introducing new features for its da Vinci systems. Some hospitals may therefore feel compelled to prepone the timing of replacing a system. While the replacement cycle will lead to meaningful new system placements in the coming years, the opportunity to place new or multiple robots also exists.

Intuitive Surgical’s proven business model provides consistent cash flow to offer a relatively safe investment opportunity for investors during periods of market volatility.  The company’s flexible balance sheet with no debt offers Intuitive Surgical the flexibility to fund acquisitions. The above factors are reflected in our long-term Outperform recommendation for the stock.

INTUITIVE SURG (ISRG): Free Stock Analysis Report
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