Here’s Why Medtronic Is A Better Pick Over Intuitive Surgical Stock

We think that Medtronic (NYSE:MDT) currently is a better pick compared to Intuitive Surgical (NASDAQ:ISRG). MDT stock trades at about 5.7x trailing revenues, compared to around 18.5x for ISRG. Does this gap in Intuitive Surgical’s valuation make sense? Actually, to some extent it does, comparing the past performance of these two companies. However, we believe that this gap will narrow going forward in favor of Medtronic. While business for both the companies have been hit during the pandemic, due to deferment of elective surgeries, it is expected to see a sharp rebound in 2021, with containment of the Covid-19.

Intuitive Surgical’s robotic surgical platforms have a limited base of around 6,000 units currently and it has seen strong growth over the recent years, given the limited competition. However, Medtronic entered into the robotic surgical systems business with its acquisition of Mazor Robotics in December 2018. Now, in December 2020, Medtronic announced that the U.S. FDA has cleared the use of its high speed drills with the Mazor Robotic Guidance System, implying Medtronic will now offer fully integrated solutions from implants and imaging to robotic assisted surgery, primarily for spine, while it is also developing another robotic system and it will likely aim for different types of procedures. We understand that the market for robotic assisted surgeries is huge, but for a company like Medtronic, it shouldn’t be tough to gain some of the market share from Intuitive Surgical, given Medtronic’s size and its strong global reach. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Medtronic vs. Intuitive Surgical: MDT stock looks undervalued compared to ISRG stock has more details on this. Parts of the analysis are summarized below.

1. Revenue Growth

Between 2017 and 2020, Medtronic’s revenues declined by about 3% from $29.7 billion in 2017 to $28.9 billion in 2020 (Medtronic’s fiscal year ends in April). Looking at the last twelve month period, revenues have dropped further to $27.9 billion, primarily due to the impact of the pandemic on its business. Looking at Intuitive Surgical, total revenue grew a solid 42% from $3.1 billion in 2017 to $4.4 billion in 2020. Intuitive Surgical’s revenue growth has been driven by expansion of its da Vinci robotic surgical platforms base, and higher demand for consumables and accessories to go with the systems.

2. Operating Income

Medtronic’s operating income declined from $5.4 billion in 2017 to $4.8 billion in 2020, due to a drop in revenues and margins contracting from 18% in 2017 to 17% in 2020. However, the margins plunged to 11% over the last twelve month period due to increased costs and limited demand for its products during the pandemic. Looking at Intuitive Surgical, the operating income declined from $1.1 billion in 2018 to $1.0 billion in 2020, as revenue growth was more than offset by margin contraction. Intuitive Surgical’s operating margins plunged 1000 bps from 34% to 24% between 2017 and 2020, partly due to increased operating costs during the pandemic, as well as higher R&D investments.

The Net of It All

There is no denying that Intuitive Surgical is a great company with a great product, and strong fundamentals, evident from its performance over the recent years. Intuitive Surgical’s revenue growth, operating income, and operating margins, all compare favorably with Medtronic over the recent years, and this has been rewarded by the investors in the form of a high multiple that ISRG stock trades at. However, as we look forward, Intuitive Surgical will see increased competition in the robotic assisted surgeries market, with Medtronic being one of the key players. While the market itself has a huge potential for multiple players to thrive, an increased competition will weigh on the multiple that ISRG stock currently enjoys, in our view. As such, we believe that the valuation gap between Medtronic and Intuitive Surgical will narrow going forward and MDT stock will offer better returns for long-term investors.

While MDT stock looks like it can gain more, 2020 has also created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Becton Dickinson vs. Abbott.

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