Intuitive Surgical Stock Appears To Be A Better Bet Over This Medical Technology Company

ISRG: Intuitive Surgical logo
Intuitive Surgical

We think that Intuitive Surgical stock (NASDAQ: ISRG) is currently is a better pick compared to Edwards Lifesciences (NYSE: EW), a medical technology company specializing in artificial heart valves and hemodynamic monitoring, despite Intuitive Surgical being the more expensive of the two. ISRG trades at about 22x trailing revenues, compared to just 14x for Edwards Lifesciences. Although both the companies have benefited from the rise in total procedure volume post-pandemic, Intuitive Surgical’s financial performance has been better over the recent years. 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 margin growth. Our dashboard Intuitive Surgical vs Edwards LifesciencesIndustry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Intuitive Surgical Revenue Growth Has Been Stronger

Now, Intuitive Surgical’s revenue growth over the last twelve month period was better than Edwards Lifesciences (27% vs. 17%), given a sharp rebound in total procedure volume, resulting in more da Vinci system placements. Even if we were to look at a longer duration, Intuitive Surgical’s last three fiscal year CAGR of 11.6% is higher than that of 8.5% CAGR for Edwards Lifesciences.

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Looking forward, Intuitive Surgical is expected to see strong revenue growth with rising demand for robotic surgical systems. For Edwards LIfesciences as well, a rebound in total procedure volume is likely to drive its revenue growth. For full-year 2021, Intuitive Surgical revenues are estimated to be north of $5.7 billion, reflecting a 30% y-o-y growth, while the growth rate is expected to slow to low teens next year. For Edwards Lifesciences, total estimated sales of $5.3 billion in 2021, reflect 20% y-o-y growth, and the growth rate is expected to slow to low double-digits in 2022. Our Intuitive Surgical Revenues dashboard provides more insight on the company’s revenues.

2. Intuitive Surgical Is More Profitable

Similar to the pattern seen in revenue growth, Intuitive Surgical’s last three year average operating margin of 29% is higher than 22% for Edwards Lifesciences. Both the companies have seen a rebound in operating margins over the recent quarters, and the last twelve-month operating margin is over 32% for both the companies. This compares with the 31% figure for Intuitive Surgical and the 26% figure for Edwards Lifesciences in 2019, before the pandemic. Overall, Intuitive Surgical’s margins have been better than Edwards Lifesciences. That said, the margins for both companies are likely to be adversely impacted in the near term due to inflationary pressure, and supply chain headwinds, but rise in the long run.

The Net of It All

Now that nearly 60% of the U.S. population is fully vaccinated against Covid-19, with overall economic activity seeing strong growth, the demand for medical devices is likely to rise going forward, boding well for both the companies. As the Covid-19 crisis winds down, the demand for medical devices sales will also normalize after the backlog of procedures is cleared. However, for Intuitive Surgical, its growth outlook is dependent on new placements for its da Vinci systems and it is likely to remain high over the coming years, given the limited competition, and rising procedure volume.

Covid-19 is proving more difficult to contain than initially thought, due to the spread of more contagious virus variants and infections in the U.S. are higher than what they were a few months back, despite them falling m-o-m in October. This may directly impact the procedure volume in some of the geographies in the near term. That said, both the companies have seen a strong rebound in demand since the pandemic. While Edwards Lifesciences current valuation is surely more attractive than that of Intuitive Surgical, with EW stock trading at about 14x trailing revenues, versus 22x for Intuitive Surgical, the latter has demonstrated better revenue growth and better profitability  over the last few years.

Not only that, even if we were to look at financial risk, Intuitive Surgical doesn’t have any significant debt, while its 63% cash as percentage of assets is also better than the 22% figure for Edwards Lifesciences. Overall, Intuitive Surgical trumps Edwards Lifesciences in most of the metrics that matter for investors and we think this gap in valuation between Intuitive Surgical and Edwards Lifesciences is largely justified. In fact, looking forward, it is likely that the gap in valuation of these two companies will remain in the foreseeable future and Intuitive Surgical may continue to outperform with its better growth prospects and lower risk.

While ISRG stock may see higher levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Abbott vs. Corcept.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Nov 2021
MTD [1]
YTD [1]
Total [2]
ISRG Return -3% 24% 382%
EW Return -2% 25% 267%
S&P 500 Return 3% 25% 110%
Trefis MS Portfolio Return -2% 49% 304%

[1] Month-to-date and year-to-date as of 11/25/2021
[2] Cumulative total returns since 2017

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