Pick Either Intuitive Surgical Or Its Industry Peer – Both May Offer Similar Returns

ISRG: Intuitive Surgical logo
Intuitive Surgical

We believe that Intuitive Surgical stock (NASDAQ: ISRG) and Edwards Lifesciences stock (NYSE: EW), in the medical devices industry, will likely give similar returns over the next three years. Intuitive Surgical is trading at a comparatively higher valuation of 15.8x trailing revenues, compared to 8.7x for Edwards Lifesciences. This gap in the valuation is justified, given Intuitive Surgical’s superior revenue growth, lower financial risk, and better growth prospects.

Looking at stock returns, ISRG, with -24% returns this year, has fared better than EW stock, down 42%, and both have underperformed the broader S&P500 index, down 16%. There is more to the comparison, and in the sections below, we discuss the possible returns from these stocks in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Intuitive Surgical vs. Edwards LifesciencesWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Intuitive Surgical’s Revenue Growth Is Better

  • Both companies managed to see sales growth over the last twelve months. Still, Intuitive Surgical has witnessed comparatively faster revenue growth of 11.3% vs. 5.3% for Edwards Lifesciences.
  • Even if we look at a longer time frame, Intuitive Surgical has fared better, with its sales rising at an average annual rate of 16.2% to $5.7 billion in 2021, compared to $3.7 billion in 2018, while Edwards Lifesciences’ sales grew at an average rate of 12.3% to $5.2 billion in 2021, compared to around $3.7  billion in 2018.
  • 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.
  • Edwards Lifesciences’ revenue growth was also impacted during the pandemic due to lower procedure volume. This trend reversed later, and the company saw revenue growth led by its Transcatheter Aortic Valve Replacement (TAVR) products, primarily the Edwards SAPIEN platform. However, of late, U.S. hospital staffing shortages and Covid headwinds in Japan have weighed on TAVR sales growth as well.
  • EW stock has been under pressure this year after a Q2 and Q3 miss and guidance cut due to forex headwinds and labor shortage.
  • Our Intuitive Surgical Revenue Comparison and Edwards Lifesciences Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Intuitive Surgical’s revenue is expected to grow faster than Edwards Lifesciences’ 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 13.7% for Intuitive Surgical, compared to a 10.3% CAGR for Edwards Lifesciences, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies negatively impacted by Covid and those 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 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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2. Edwards Lifesciences Is More Profitable, But It Comes With Higher Risk

  • Intuitive Surgical’s operating margin of 20.5% over the last twelve months is lower than 31.6% for Edwards Lifesciences.
  • This compares with 30.7% and 26.9% figures seen in 2019, before the pandemic, respectively.
  • Our Intuitive Surgical Operating Income Comparison and Edwards Lifesciences Operating Income Comparison dashboards have more details.
  • Intuitive Surgical’s free cash flow margin of 31.4% is higher than 24.4% for Edwards Lifesciences.
  • Looking at financial risk, Intuitive Surgical is much better placed than Edwards Lifesciences. Its 0.5% debt as a percentage of equity is lower than 1.3% for the latter, while its 61.7% cash as a percentage of assets is much higher than 20.1% for the latter, implying that Intuitive Surgical has a better debt position, and has more cash cushion.

3. The Net of It All

  • Intuitive Surgical has demonstrated better revenue growth and offers lower financial risk. On the other hand, Edwards Lifesciences is more profitable and 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 both stocks are likely to offer similar returns.
  • The table below summarizes our revenue and return expectations for Intuitive Surgical and Edwards Lifesciences over the next three years and points to an expected return of 44% for ISRG over this period vs. a 41% expected return for EW stock, implying that both stocks offer good buying opportunity at current levels, based on Trefis Machine Learning analysis – Intuitive Surgical vs. Edwards Lifesciences – which also provides more details on how we arrive at these numbers.

While ISRG and EW stocks may offer similar returns, it is helpful to see how Intuitive Surgical’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Syneos Health vs. Amerco.

With inflation rising and the Fed raising interest rates, among other factors, ISRG stock has plunged 24% this year. Can it drop more? See how low Intuitive Surgical stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Dec 2022
MTD [1]
YTD [1]
Total [2]
ISRG Return 1% -24% 289%
EW Return -2% -42% 141%
S&P 500 Return -2% -16% 78%
Trefis Multi-Strategy Portfolio -2% -19% 221%

[1] Month-to-date and year-to-date as of 12/13/2022
[2] Cumulative total returns since the end of 2016

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