"Intuitive Surgical (NASDAQ: ISRG) manufactures and sells the da Vinci Surgical System, which allows doctors to perform complex surgeries through a small, minimally invasive incision," notes Paul Tracy.
In his Street Authority Market Advisor, the growth stock expert explains, "The company is a proven grower in a defensive industry group; further, the stock is trading at its lowest valuation since 2001."
"Unlike traditional surgery, physicians do not control their instruments directly; instead, the da Vinci system interprets hand movements to control a robotic arm and instruments.
"The da Vinci system is clinically proven to shorten patients' recovery times and reduce the risk of complications. In addition, da Vinci's three-dimensional display is easier for doctors to read than traditional monitors used for minimally invasive surgeries.
"As a result, the installation of da Vinci can cut a hospital's overall cost while increasing patient satisfaction. These basic advantages have meant that Intuitive Surgical has had little difficulty encouraging more hospitals to buy the system.
"As of the end of September, ISRG has 1,032 systems installed worldwide, up from about 800 at the end of 2007 and less than 600 at the end of 2006. The company believes that it has the potential to install a total of 6,000 systems worldwide -- 4,000 in the US and 2,000 internationally.
"Sales of new da Vinci systems account for only 54% of revenues. Each surgical procedure performed on the system requires roughly $1,500 to $2,000 worth of disposable instruments and accessories -- sales of these products generate another 33% of total revenues.
"This figure could rise even further as da Vinci gains approval for a wider range of surgical procedures. Finally, each system costs about $140,000 per year to service and maintain, generating the remainder of sales. As ISRG grows its installed base, the value of these recurring revenue streams also rises.
"In addition, hospital spending on key equipment such as the da Vinci system tends to be relatively insensitive to economic growth. It's likely ISRG's growth won't be adversely affected by current economic conditions.
"Currently, Intuitive Surgical has no direct competitors. A new competitor could certainly enter the market, but would face a growing competitive disadvantage. ISRG now has a large and growing installed base of equipment globally.
"Legions of surgeons have already been trained on ISRG machines -- it would be difficult and time-consuming to retrain these doctors on a new system.
"Moreover, the average selling price of an ISRG machine is $1.35 million, and a large hospital could have three or more machines. Unless there is a major advantage, there would be little incentive to shell out additional money for a competitor's system.
"Even better, ISRG has more than 500 patents globally covering various technologies related to its robotics systems. These patents would make it tough for a competitor to enter the market and design an equally effective product.
"Intuitive Surgical currently trades at roughly 23 times projected 2009 earnings estimates and has a long-term growth rate of roughly 33%, giving it a PEG ratio is just 0.70. Considering the defensive, recession-resistant nature of ISRG's core market, that's inexpensive.
"ISRG also has a strong balance sheet with no debt, more than $400 million in cash and free cash flow of roughly $260 million annually. The stock looks like a solid 'Buy' candidate."
