Hear Money Roar!
Depends on your definition of “important,” I suppose.
So, nothing much important is happening out there right now (other than a strike at a Scottish oil facility), so I’ll do something a little different.
Company: Intuitive Surgical, Inc. (NASDAQ: ISRG)
Industry: Medical Appliances/Equipment
2007 Profit: $144.5M
Current Market Capitalization: ~ $11B
Current Price/Earnings: ~ 68
Industry Avg. P/E: ~37
ISRG is the producer of what sounds like a very nifty surgical system called “da Vinci” that really looks like some sort of Star Wars set up. Am I kidding? You decide.
Wiggle your fingers over here, and over there the multi armed android picks up Luke and throws him in the bacta tank. Unfortunately, ISRG seems to suffer from a few flaws as a company: It’s expensive (PE), it seems to be a one trick pony, and I question its management real hard.
A) It’s expensive. I’ve stated before than P/E isn’t everything. It’s commonly calculated based on historical profit levels, which can be a mistake because you aren’t investing for what a company HAS done, but what it might DO (and if you are investing in the past, then you might be used to investing in dot coms in 2000 and homebuilders just last year). A stock with very high growth expectations can support a high PE because such great things are expected going forward. ISRG is one such company with high expectations, yet even then the stock seems over priced. While ISRG’s PE is a steep 68 using historical profits, its a still pricey 56.8 using average estimates for 2008 profits. Even taking the estimated 2009 profits, we still come out with a P/E of about 41. Further, this with large increases in profits built into the estimates… and a recent history of beating estimates. I have a strong feeling that this is a company that will be punished for failing to outperform expectations. Merely having as great a year as expected will probably cause the stock price to drop, bringing the PE more in line with its expected growth.
Adding more cause for concern, of the 11 analysts covering the company (as listed by Yahoo), 6 have lowered their expectations for 2nd quarter earnings in the last month (4 have increased), and 10 have lowered their forecasts for the 3rd quarter. So given that the current future earnings estimates are accurate, the stock seems expensive, but factoring in that their seems to be some softness in the future earnings expectations….
B) One trick pony. ISRG has the da Vinci and… and… well, a different configuation of the da Vinci. This one comes with a bacta tank, this other one has welder arms to fix up your droids. In a world of wild, wild technological innovation, being a one trick pony carries a high level of risk (polaroid?). Sure, sure… patents, I know. Patents won’t keep GE, Hitachi, or some other company from coming up with the new things that makes your ass obsolete, patents or not. The best way to fend that off is to do the hard R&D to keep yourself at the forefront or to use your piles of profit to acquire promising rivals/complementary companies that might both enhance and diversify your product offering. Sadly, ISRG doesn’t appear to be spending enough money in R&D to protect their advantage, as to the second point…
C) Bad management. Why do I point the bad management finger at ISRG? As a medical equipment and technology company, you’d think their business arena is fairly well defined. Why, then, is this company sitting on almost $700 million in cash and conservative bond investments? $101M in MONEY MARKET accounts? Another $101 in US government debt?? What the hell? On top of that, the company has very little in the way of liabilities (about 5x as much cash and investments as liabilities).
So, maybe this just sounds prudent to you, and if we were talking about personal finances I’d agree. This is a company, however. They have R&D they could be spending money on. They have competitors that they could be buying controlling stakes in (and with such a strong balance sheet, finding financing to leverage the buyout would be easy). They have shareholders they need to be delivering value to (read: stock buy backs).
No no no! We need to put out money in safe, low return investments. We don’t need to expand our product line or do R&D. Our product will live FOREVER!!
I’d like to point out, also, that this company would rather put $100M in bonds and government debt and collect a fully taxable 4-6% return than to spend money buying back stock from the open market. Most companies, when sitting on a treasure chest of money and nothing else to do (since a tech company clearly doesn’t need to invest in itself), will usually either pay a dividend or buy back a ton of stock (which is a different way of distributing returns to shareholders). Look at Exxon: ton of cash, not much to do with it, so they A) pay a dividend ($1.40/share right now) AND B) fund a massive stock buyback program (buying up $78 BILLION in company stock in since Jan 1, 2005).
Maybe ISRG management considers a cash a better investment that company stock? Either way, their balance sheet management doesn’t impress me. In fact, ISRG has been too busy issuing new stock to buy back any… and for what are they issuing this new stock? To buy more bonds? It’s hardly like they need to raise more funding.
To conclude, if you couldn’t guess: Thumbs down on ISRG. Their product seems great, but the stock is overvalued even assuming the ability to reach lofty earnings goals. In addition, I am clearly not impressed by the strategic direction (or lack thereof) that has been imparted by the company management. IF, suddenly, management showed some sack and started building a company that appeared to be durable (and not a one ring circus) by putting some of the lazy cash sitting around to good work, then maybe – MAYBE – it’s worth investing in.
Enjoy your tasty treat,
Oskar Schindler
