We think that Intuitive Surgical stock (NASDAQ: ISRG) is currently is a better pick compared to Medtronic stock (NYSE: MDT), despite Intuitive Surgical being the more expensive of the two. ISRG trades at about 23x trailing revenues, compared to just 5x for Medtronic. 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 Medtronic vs Intuitive Surgical: Industry 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 Medtronic (27% vs. 13%), 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 12% is much higher than that of 0.2% CAGR for Medtronic. Note that the revenue base for Medtronic is much larger with $32 billion sales in the last twelve months compared to under $6 billion for Intuitive Surgical.
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Looking forward, Intuitive Surgical is expected to see strong revenue growth with rising demand for robotic surgical systems. For Medtronic 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 25% growth over the 2019 sales. For Medtronic, total estimated sales of $33.2 billion in fiscal 2022 (fiscal ends in April), reflect 15% growth over its 2019 revenue of $28.9 billion. Our Medtronic Revenues dashboard provides more insight on the company’s revenues.
2. Intuitive Surgical Has Better Profitability
Unlike the pattern seen in revenue growth, Intuitive Surgical’s operating margin change of -8% over the last three years is worse than -6% for Medtronic. However, Intuitive Surgical’s operating margins have rebounded over the recent quarters, and it stood at 32.2% over the last twelve month period, compared to 30.6% in 2019, before the pandemic. The current operating margin of 14.7% for Medtronic is lower compared to Intuitive Surgical, and it compares with the 20.5% figure in 2019. Overall, Intuitive Surgical’s margins are much better than Medtronic and that has been the case even if we were to look at historical years. 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 over half of the U.S. population is fully vaccinated against Covid-19, with overall economic activity picking up, the demand for medical devices is likely to rise going forward, boding well for Medtronic. 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 the 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 Medtronic’s current valuation is surely more attractive than that of Intuitive Surgical, with MDT stock trading at about 5x trailing revenues, versus 23x 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 11% figure for Medtronic. Overall, Intuitive Surgical trumps Medtronic in most of the metrics that matter for investors and we think this gap in valuation between Intuitive Surgical and Medtronic 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.
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