Is There More Upside For Intuitive Surgical’s Stock After A 50% Rebound?

Intuitive Surgical’s stock (NASDAQ: ISRG) has outperformed with over a 50% gain since the recent lows of March 23, compared to the broader S&P 500, which gained 34%. Looking at other medical device companies, Abbott and Boston Scientific gained 40% each, and Medtronic rose 31%. Why is that? The healthcare sector, in general, has remained resilient throughout the crisis, thus far. Intuitive Surgical has seen strong growth in its installed base of robotic systems, and that translates into higher demand for its instruments & accessories, thereby driving strong sales growth over the past years.

Having said that, Intuitive Surgical is not immune to the current crisis. Its top line is expected to take a significant hit in the near term, due to a decline in elective surgeries. Most of the elective surgeries are postponed, which has resulted in a backlog for surgeries. We believe that Intuitive Surgical will be quick to come back to strong revenue growth, as economies gradually start to open up. While the stock price has moved up 50% from recent lows, it still offers more room for upside, as we detail in the Intuitive Surgical valuation dashboard. Our valuation for Intuitive Surgical takes into account the latest earnings as well as the company’s guidance. Our valuation is based on 4 factors: Total Revenue, its Net Income Margin, No. of Shares, and P/E Multiple. We discuss these factors below.

After A Near Term Disruption Expect Strong Sales Growth To Return

• Intuitive Surgical’s Revenues have seen a substantial increase of 42.7% from around $3.1 billion in 2017 to $4.5 billion in 2019, and we expect it to remain around the same level in 2020. The revenue growth is expected to pause in 2020 owing to the current Covid-19 crisis, which has resulted in postponement of several types of elective surgeries, thereby impacting the demand for the company’s systems. However, growth will likely resume from late Q3 or early Q4 this year. The growing demand for the company’s products can be attributed to some of the benefits of surgeries performed through robotic platforms. It includes, fewer and smaller incisions, less blood loss, shorter hospital stays, faster recoveries, and fewer scars than traditional open surgery. There is immense room for Intuitive Surgical to grow in the robotic surgical platforms market, and it has a limited competition thus far.
• Intuitive Surgical’s Adjusted Net Income has increased from around $1.1 billion in 2017 to $1.5 billion in 2019, and we expect it to fall to $1.3 billion in 2020. This change is likely to be led by flat revenues and weaker margins.
• The company’s Adjusted EPS has increased 40% from $9.09 in 2017 to $12.76 in 2019, and we expect it to fall to $11.01 in 2020. The change in EPS can primarily be attributed to a reduction in adjusted net income.
• Our Price Estimate of $600 For Intuitive Surgical’s Stock is based on our detailed valuation model, and implies a 54.5x P/E Multiple on expected 2020 Adjusted EPS of $11.01.

While we have a fair price estimate of $600 for the company, we also consider an outlier scenario of Intuitive Surgical falling below $400, due to the impact of the Covid-19 crisis.

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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