Faster Sales Growth Favors Intuitive Surgical

For those unfamiliar with Intuitive, it introduced the da Vinci surgical system in 1999. Since the late 1980s, surgeons have replaced cut-'em-open-and-look-around procedures with minimally invasive ones. These typically use some combination of a fiber-optic tube for viewing, called an endoscope, and slender instruments. Cuts are smaller, so patients heal faster. The only trouble is, endoscopic surgery is sometimes more difficult than traditional surgery. Picture playing the board game Operation. It's difficult enough to perform a funny-bonectomy without touching the tweezers to the metal part, thus setting off the buzzer and illuminating Cavity Sam's nose. Now imagine performing the procedure by working off a video feed.

Enter da Vinci. It's a robot. Instead of working a scope, the surgeon operates three or four arms via a console. One has a camera. Two slice and sew. An optional fourth arm moves stuff out of the way. The tools are interchangeable, so da Vinci can do it all: hearts, nerves and more. Perhaps most useful, it can downscale hand movements, allowing even clumsy surgeons to perform precision tasks.

You won't be buying your own da Vinci to use for shaking martinis anytime soon. Systems cost around $1.3 million. But hospitals agree that they save money and lives. The company has already sold more than 650 machines, mostly in the U.S. and Europe. Analysts say more than 50% of America's prostate removals (a last-resort option for cancer patients) are done with da Vincis, and that the number of uterus removals (likewise) done with the device should nearly triple this year. Last year sales jumped 64%. Last quarter they increased 61%.

Not surprisingly, Intuitive Surgical comes to our attention via our Accelerating Sales Growth screen. It looks for companies whose sales are growing faster now than in the past, the reverse of what typically happens as a company ages. See our screen recipe for details on the demands and use our stock screener anytime to run the search yourself. Also, have a look if you like at seven other stocks the screen recently produced.

Back to Intuitive. Is it worth the price? Prospects for the company are undoubtedly bright, particularly since it merged with its only significant competitor in 2003. Not only is it expected to sell plenty more machines in coming years, but its installed base brings recurring revenues: about $130,000 a year per machine in service agreements and close to $2,000 per procedure in doo-dads that can't be reused. Also, we're getting old and fat as a nation, which bodes well for most things medical.

Better to evaluate the company based on profits rather than sales, because its margins are unusually plump and fairly protected. Earnings per share are poised to increase 61% to $3.05 this year. Over the past year cash profits have eclipsed paper ones — a welcome sign, since the reverse is sometimes true of companies that rely too heavily on accountants rather than salespeople to hit their numbers. The forecast puts the stock at 79 times earnings. That's more than four times the S&P 500 index's median price/earnings ratio. Were I to pay that, I'd want to get more than four times the index's future earnings growth in return. Let's call it 40% or more per year over the next five years. Earnings for Intuitive are seen increasing 39% next year. But the company has beaten forecasts by an average of 17% over its past four quarters. Also, it has no debt and around $300 million ($8 a share) in cash and short-term investments.

All told, there's no shame in paying $240 for the stock, although perhaps no urgency to do so, either. At that price it's about as good a deal relative to its growth prospects as the broad market. And the broad market, while slightly more expensive than it has been on average over the past century, is still a fine deal relative to other asset classes. Just note that Intuitive is a high-expectations company, which gives it a fair amount of risk as a stock. It's not for little Timmy's college fund.