What’s Driving Our $567 Price Estimate For Intuitive Surgical?

by Trefis Team
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Intuitive Surgical
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Intuitive Surgical’s (NASDAQ:ISRG) stock price has declined over 15% since the last month or so. This can be attributed to the company’s Q1 performance, which was lower than the average estimates. However, after the recent correction, the stock price seems to have some room for growth. This note details Trefis’ forecasts for Intuitive Surgical for 2019. You can view our interactive dashboard analysis on ~ What’s Driving Our $567 Price Estimate For Intuitive Surgical? ~ for more details on the expected performance of the company. In addition, you can see more of our data for healthcare companies here.

What Are The Key Sources of Intuitive Surgical’s Revenue, And How Have They Trended In The Recent Quarters?

  • Intuitive Surgical generates its revenues primarily from three sources: system sales, instruments & accessories sales, and services.
  • System sales refers to da Vinci surgical systems, which are computer assisted systems that help surgeons perform minimally invasive surgeries by controlling the device from a console. Systems revenue of $1.13 billion in 2018 accounted for 30% of the company’s total sales.
  • Instruments & accessories sales includes EndoWrist devices, which have tools such as forceps and scissors attached to them, in order to provide better control to surgeons. Accessories include sterile drapes, camera heads, vision products, light guides, and other devices. The segment revenues of $1.96 billion in 2018 contributed 53% to the company’s top line.
  • Services includes full-time support to its customers, from installing the surgical systems to repairing and maintaining them. The segment revenues of $635 million in 2018 represented 17% of the company’s total sales.
  • Total Revenues for Intuitive Surgical have largely trended higher over recent quarters, growing from $892 million in Q4 2017 to $974 million in Q1 2019. The growth can primarily be attributed to higher sales of accessories.

How Does The Revenue Growth of Intuitive Surgical Compare To Its Peers?

  • Intuitive Surgical’s average revenue growth of 2.1% over the past 5 quarters has been higher than some of the other healthcare companies.
  • Boston Scientific’s revenues have grown at an average of 0.8% from $2.41 billion in Q4 2017 to $2.56 billion in Q1 2019.
  • Abbott’s revenues have declined at an average of -0.1% from $7.58 billion in Q4 2017 to $7.54 billion in Q1 2019.

How Much Can Intuitive Surgical’s Top Line Grow In 2019?

  • Intuitive Surgical’s revenues will likely grow in the low teens to $4.25 billion in 2019.
  • da Vinci systems sales grew from $633 million in 2014 to $1.13 billion in 2018, led by growth in procedures, and we expect this trend to continue in the coming years. Systems revenue growth will be led by higher demand for surgical robotic systems, given the widened scope of procedures performed. The company has guided for 15% to 17% procedure growth in 2019. Also, the overall minimally invasive surgical systems market is expected to grow in high single-digits to over $40 billion in the coming years.
  • Instrument & Accessories revenue also saw strong revenue growth from $1.07 billion in 2014 to $1.96 billion in 2018. The segment revenues can be linked to the company’s installed base, and growth in procedures, which have been trending higher of late, and we expect this trend to continue in the near term. The company’s installed base grew 13% in 2018, and it will likely grow in high single-digits in 2019. This can be attributed to the advantages of minimally invasive surgeries through da Vinci Surgical Systems. They entail fewer and smaller incisions, less blood loss, shorter hospital stays, faster recoveries, and fewer scars than traditional open surgery, thereby aiding the overall demand.
  • Services revenue grew from $429 million in 2014 to $635 million in 2018, led by growth in the company’s installed base. The segment revenues could grow to $692 million in 2019, driven by an expected growth in the company’s installed base.

How Much Can Intuitive Surgical’s Earnings Grow Based On The Expected Revenue Trends Above?

  • Intuitive Surgical’s full year 2019 earnings will likely be $11.85 per share, reflecting an 8% growth over 2018.
  • Consensus earnings estimate ~ 11.72
  • Earnings growth can be attributed to higher revenues, lower share count, partly offset by an expected decline in margins.
  • The company has guided for a 50-150 bps decline in gross margins, and higher expenses, due to costs associated with the expansion in the emerging markets, primarily China, India, and Taiwan.

What Is Intuitive Surgical’s Fair Value Share Price Estimate Based On the Above?

  • Our price estimate of $567 for Intuitive Surgical is based on a 48x price to earnings multiple, and earnings of $11.85 per share in 2019.
  • The multiple for Intuitive Surgical is higher than the average for healthcare companies, given it could garner strong growth in the long run with its robotic surgical devices.

 

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