We think Intuitive Surgical stock (NASDAQ: ISRG) is currently a better pick than Ralph Lauren stock (NYSE: RL), despite ISRG being the more expensive of the two with its P/S ratio of 18.7x, compared to just 1.4x for RL stock. We compare these two companies due to their similar revenue base. Although the two companies are from different sectors, we believe that this gap in the valuation is justified, given Intuitive Surgical’s superior revenue growth, better profitability, lower financial risk, and better growth prospects.
If we look at stock returns, Intuitive Surgical’s 21% growth has been much better than the -5% change for Ralph Lauren over the last twelve months. This compares with 13% growth in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, Intuitive Surgical is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that ISRG stock will offer better returns than RL 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 Ralph Lauren vs. Intuitive Surgical: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Intuitive Surgical’s Revenue Growth Has Been Stronger
- Both companies managed to see sales growth over the last twelve months. Still, Ralph Lauren has witnessed comparatively faster revenue growth of 36.3% vs. 31.0% for Intuitive Surgical.
- Looking at a longer time frame, Ralph Lauren’s sales declined to $6.0 billion over the last twelve months, compared to $6.3 billion in fiscal 2019, while Intuitive Surgical’s revenues grew at a CAGR of 6% to $5.7 billion currently, compared to $3.7 billion in 2018.
- For Ralph Lauren, the revenue growth has been significantly impacted by the Covid-19 disruptions in fiscal 2021. The company saw a significant 29% y-o-y decline in sales in fiscal 2021. However, with the economies now opened up, the rebound in sales has also been strong. The digital transition and accelerating demand in key geographies, including the U.S. and China, have buoyed growth for the company in the recent past.
- 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.
- Our Ralph Lauren Revenue and Intuitive Surgical Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, Intuitive Surgical’s revenue is expected to grow at a faster pace compared to Ralph Lauren 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 14.0% for Intuitive Surgical, compared to a 4.0% CAGR for Ralph Lauren, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies negatively impacted by Covid and for companies 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 in the 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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- Intuitive Surgical’s operating margin of 31.9% over the last twelve months is far better than 13.2% for Ralph Lauren.
- This compares with 30.7% and 8.9% figures seen in 2019, before the pandemic, respectively.
- Our Ralph Lauren Operating Income and Intuitive Surgical Operating Income dashboards have more details.
- Intuitive Surgical’s free cash flow margin of 37% is much higher than 14% for Ralph Lauren.
- Looking at financial risk, Intuitive Surgical is much better placed than Ralph Lauren. Its <1% debt as a percentage of equity is much lower than 19% for Ralph Lauren, while its 64% cash as a percentage of assets is much higher than 37% for the latter, implying that Intuitive Surgical has a better debt position and a higher cash cushion.
3. The Net of It All
- Intuitive Surgical has demonstrated better revenue growth and superior profitability, and it offers lower financial risk. However, Ralph Lauren is available at a relatively 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.
- The table below summarizes our revenue and return expectations for Ralph Lauren and Intuitive Surgical over the next three years and points to an expected return of 35% for ISRG over this period vs. a 7% expected return for RL stock, implying that investors are better off buying ISRG over RL, despite its high valuation, based on Trefis Machine Learning analysis – Ralph Lauren vs. Intuitive Surgical – which also provides more details on how we arrive at these numbers.
While ISRG stock may outperform RL, the Covid-19 crisis 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 Medtronic vs. Masco.
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.
|S&P 500 Return||0%||-5%||103%|
|Trefis MS Portfolio Return||3%||-7%||264%|
 Month-to-date and year-to-date as of 4/1/2022
 Cumulative total returns since the end of 2016