Note from Daily Trade Alert: The following article first appeared in The Growth Stock Advisor, a premium newsletter offered by Investors Alley.

When I hear the word surgery, my mind flashes to the so-called “meatball surgery” as depicted on the TV show M*A*S*H—the kind of lifesaving surgery that’s meant to quickly stabilize a patient, but not much more.

M*A*S*H* depicted doctors and nurses in a mobile army surgical hospital (MASH) during theKorean War, fighting to save soldiers’ lives. The movie and subsequent television show were largely based on a book by a real-life MASH doctor, Dr. H. Richard Hornberger, called MASH: A Novel About Three Army Doctors, published in 1968.

MASH units were all converted to Combat Support Hospitals in 2006, but that’s not the only thing that’s changed about practicing medicine in the years since the Korean War. Thanks to technology, surgery itself has changed significantly.

In fact, we now have robotic surgery. And I want to present to you one of the pioneers in robotic surgery, and a leader in the medical technology (medtech) industry, which has empowered physicians to carry out complex surgeries via a minimally-invasive approach: Intuitive Surgical (ISRG).

The Number One Robotic Surgery Company

Intuitive Surgical was founded in 1995, and today, its main robotic device—the da Vinci—can be found in 67 countries. Nearly 6,000 da Vinci products have been installed to date.

Surgeons use the da Vinci system while seated at an ergonomic console while viewing a three-dimensional, high-definition image of the surgical field. Interactive arms follow the surgeon’s movements, their dexterity aided by the company’s EndoWrist technology, which incorporates robotic “wrist joints.”

Intuitive’s “robots” can be used in numerous surgical operations within the company’s targeted areas of gynecology, urology, general surgery, cardiothoracic surgery, and certain head and neck surgeries. The company helps surgeons to learn how to use the system and develop their skills through advanced training tools via a simulation program. This training continued throughout the pandemic.

Intuitive’s strategy seems to be a big success. Here are some points to consider, according to FinTech Zoom: “A surgeon starts a procedure using da Vinci machinery every 25.4 seconds. More than 8.5 million procedures using the company’s technology were completed in 2020 alone.”

ISRG’s Success

Yet, despite those impressive numbers, Intuitive Surgical’s management believes there is room to grow.

One area for possible growth is in soft tissue operations. Roughly 20 million such operations take place each year in Intuitive’s markets. Management reckons that in the future many of those surgeries will be done using advanced technologies like Intuitive’s.

Growth plans aside, the company is already doing quite well, thank you. Intuitive Surgical’s da Vinci sales come from both direct sales and lease arrangements. The da Vinci system typically sells for between $500,000 and $2.5 million.

However, da Vinci is not the company’s only revenue driver. The FDA has cleared Iris, Intuitive’s augmented reality (AR) imaging product, for use in kidney procedures. It also approved the company’s Ion endoluminal system in 2019, enabling minimally invasive biopsies in the lung.

Intuitive Surgical makes money from both the sale of robotic instruments and from services provided. It typically earns between $600 and $3,500 in instrument revenues from every surgical procedure performed using the company’s technology. Overall, such revenues made up 56% of its top line at $2.46 billion in 2020.

And as tools wear out, they need to be replaced, which of course generates more recurring revenue. Altogether, repeat sales—including instruments, services, and operating leases—stood at $3.2 billion last year, or 68% of total revenue.

This sales model has been successful, to say the least. Intuitive Surgical achieved a compound annual revenue growth rate (CAGR) of 18.3% per cent in the three years to 2019 (pre-pandemic). Earnings per share (EPS) rose at a rate of 22.9%.

What I Like Most

There are two things I like to see in a company I invest in.

First, we’ll start with international sales outside the United States. Intuitive Surgical checks that box. Sales here in the U.S. account for about two-thirds of the company’s total, but increased international exposure should position it well as the company faces intensifying competition in its markets.

I also like to see some sort of “Buffett moat,” which the company has through the patents it holds. Intuitive’s technology is protected by more than 4,000 patents. And as of year-end 2020, it had filed a further 2,000 patent applications.

Such defensive patent activity is crucial in helping the company stay ahead of its competition. Healthcare giants Johnson & Johnson (JNJ) and Medtronic (MDT) want a piece of the robotic surgery pie. Both firms certainly have the scale and wherewithal to make a success of it. And both have lots of experience in soft tissue surgery.

Now, let’s look at how Intuitive Surgical is doing so far in 2021. The year has started well, with the company shipping 298 da Vinci systems in the first quarter. That’s up 26% compared to the same period in 2020. Global da Vinci procedures rose 16%.

Numbers posted on April 20 showed revenue growth of 18% year-on-year, reaching $1.29 billion. That beat Factset consensus forecasts of $1.11 billion. Intuitive’s EPS of $3.52 topped estimates of $2.64. The company ended the quarter with $7.2 billion in cash and no debt.

Intuitive Surgical’s strong growth in procedures in the first quarter was the most surprising part of its performance. With a 17% year-on-year recovery, procedures now have returned to pre-pandemic levels. The company’s confident full-year guidance for a 22%-26% growth in procedures implies significant pent-up demand.

These results are darn good considering the still-lingering effects of the pandemic on elective surgeries, and reinforce the notion that Intuitive Surgical has always had a superb record when it comes to organic growth and returns on capital.

I believe Intuitive Surgical’s ongoing market leadership, new products, international expansion, and as-yet-unexplored surgical territory help justify its lofty forward price-earnings multiple of 51 times. At least for now; however, because of incoming competition, it is only a 4-star stock. The shares can be bought at any price up to $900 a share. Recall that most brokers now allow purchases of fractional shares.

— Tony Daltorio

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Source: Growth Stock Advisor