We believe Intuitive Surgical stock (NASDAQ: ISRG) is currently a better pick than Abbott stock (NYSE: ABT), given its better prospects. Although Abbott is trading at a comparatively lower valuation of 4.1x trailing revenues vs. 15.2x for Intuitive Surgical, this gap in the valuation is justified mainly given the latter’s superior revenue growth and lower financial risk, as discussed below.
If we look at stock returns, both ABT and ISRG, with over a 25% fall this year, have underperformed the broader S&P 500 index, down 16%. There is more to the comparison, and in the sections below, we discuss why we believe ISRG stock will offer better returns than ABT stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation multiple, in an interactive dashboard analysis of Abbott vs. Intuitive Surgical: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Intuitive Surgical’s Revenue Growth Is Far Better
- Intuitive Surgical’s revenue growth of 11.3% over the last twelve months is higher than 6.4% for Abbott.
- Even if we look at a longer time frame, Intuitive Surgical’s sales growth has been better. It rose at an average annual growth rate of 16.2% to $5.7 billion in 2021, compared to $3.7 billion in 2018, while Abbott saw its revenue rise at an average annual rate of 12.4% to $43.1 billion in 2021, compared to $30.6 billion in 2018.
- Abbott’s sales growth over the recent years was driven by a very high demand for Covid-19 testing. However, as the Covid-19 cases have declined over the recent quarters, the demand for testing is falling, weighing on Abbott’s diagnostics business.
- That said, the company’s medical devices and established pharmaceutical sales will likely see steady growth over the coming years.
- For Intuitive Surgical, revenue growth over the recent past has been driven by a rebound in procedure volume, which was adversely impacted in the initial phases of the pandemic due to the shelter-in-place restrictions. The company continues to expand its installed base, which results in the growth of recurring revenues, such as consumables.
- That said, the stock has seen a meaningful correction this year, partly due to the challenging macroeconomic environment and a Q2 miss. This trend reversed after its upbeat Q3 results and the company’s announcement of an additional $1 billion in share buybacks.
- Our Abbott Revenue Comparison and Intuitive Surgical Revenue Comparison dashboards provide more insight into the companies’ sales.
- Looking forward, Intuitive Surgical’s revenue is expected to grow faster than Abbott’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 13.7% for Intuitive Surgical, compared to a 4.2% CAGR for Abbott, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Abbott Is More Profitable
- Abbott’s operating margin of 22.1% over the last twelve-month period is slightly better than 20.5% for Intuitive Surgical.
- However, the operating margin has been better for Intuitive Surgical over recent years.
- The figures stood at 16.1% and 30.7% in 2019, before the pandemic, respectively.
- Intuitive Surgical’s free cash flow margin of 31.4% is also better than 22.9% for Abbott.
- Our Abbott Operating Income and Intuitive Surgical Operating Income dashboards have more details.
- Looking at financial risk, Intuitive Surgical fares much better. Its 0.5% debt as a percentage of equity is lower than 8.9% for Abbott, while its 61.7% cash as a percentage of assets is higher than the 13.6% for the latter, implying that Intuitive Surgical has a better debt position and also has more cash cushion.
3. The Net of It All
- We see that Intuitive Surgical has demonstrated better revenue growth and offers lower financial risk with a better debt position and more cash cushion. Although its operating margin is currently a tad lower than Abbott’s, it has been better in recent years. On the other hand, Abbott is available at a comparatively lower valuation.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Intuitive Surgical is currently the better choice of the two, despite it being the more expensive one.
- The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 47% for Intuitive Surgical over this period and a 16% expected return for Abbott stock, implying that investors will likely be better off buying ISRG over ABT, based on Trefis Machine Learning analysis – Abbott vs. Intuitive Surgical – which also provides more details on how we arrive at these numbers.
Furthermore, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Xylem vs. Merck.
With higher inflation and the Fed raising interest rates, among other factors, ABT stock has fallen 25% this year. Can it drop more? See how low Abbott stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||3%||-16%||79%|
|Trefis Multi-Strategy Portfolio||3%||-20%||217%|
 Month-to-date and year-to-date as of 11/23/2022
 Cumulative total returns since the end of 2016