Buy, Sell, or Hold: Intuitive Surgical

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When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upsides outweighs its risks. Let's take a look at robotic-surgery-machine maker Intuitive Surgical (NAS: ISRG) today, and see why you might want to buy, sell, or hold it.

The company, with a recent market capitalization of $21 billion, has seen its stock surge by an annual average of more than 40% over the past decade.

Buy
One reason to consider buying this stock is its business. Robotic surgery appears to be the wave of the future when it comes to common operations that millions of people undergo. And within this burgeoning new niche in the medical equipment industry, Intuitive is a market leader; it is profitable and has an installed base of more than 2,200 machines in the U.S., Europe, and elsewhere.


Intuitive towers over other innovators in its space such as MAKO Surgical (NAS: MAKO) and NuVasive (NAS: NUVA) , both of which have a market cap of only about $1 billion, and net losses instead of gains. Hansen Medical (NAS: HNSN) , with a market cap of about $140 million is also unprofitable. MAKO specializes in hip and knee replacements, NuVasive in spinal surgeries, and Hansen in catheter placements.

The business model is exciting, as well. It's true that the more surgery machines the company sells to hospitals the more money it will make. But each sale brings with it a lot of recurring revenue, as well, such as via service contracts, instruments, and accessories. (Instruments and accessories average $1,300 to $2,200 per procedure, and annual service contracts range from $100,000 to $170,000.)

There's a powerful competitive advantage at work, too. Once a hospital buys a machine, it's likely to keep it as more doctors are trained on it and grow used to using it. Its brand, patents, and monopoly position also serve to give it pricing power, and part of its revenue boosts has come from raised prices.

Intuitive's growth rate is a further plus, with revenue up 24% over the past year, and earnings up 30%. Some 360,000 procedures were performed with Intuitive's daVinci machines in 2011, up 29% over 2010 levels.

The company's management inspires confidence, as well. They recently explained a lack of stock-buyback zeal by noting that they concur with Warren Buffett's thinking, that buybacks only make sense when a company has ample cash and the stock is undervalued. Many managements are not able to show such restraint.

More than 80,000 prostatectomy procedures are performed annually using Intuitive's daVinci system. Plans are under way to make further gains with machines that help surgeons perform other procedures, too, such as gall bladder removals and more advanced heart and lung surgeries. Each new procedure will introduce a new revenue stream, and sales of supplies and accessories for the machines will grow, as well.

Finally, this isn't a very good reason to consider buying, as it's purely speculative, but some investors think that the company could be an attractive acquisition target for a much bigger company, such as Johnson & Johnson or General Electric.

Sell
One danger with the stock is that if President Obama's health reform plan remains in effect after the Supreme Court upheld it earlier this week, Intuitive will face a 2.3% tax on its revenue in order to help fund the law.

Another concern is the company's growth rate. Yes, it's growing astonishingly rapidly. But its growth rates for revenue and earnings have been declining in recent years. (In the company's defense, a slowing is kind of inevitable over time, and the now-slower growth rates are still very brisk. And besides, the slowing is not necessarily unavoidable.

Remember how the company has not been buying back gobs of shares due to sound, rational thinking? Well, that reflects another reason to consider selling or at least not buying the stock: Management seems to think that it's not very undervalued right now.

Finally, the company faces some risks, too, such as a worsening economic environment, which could have hospitals delaying or avoiding purchases for a long time. In addition, some argue that studies don't conclusively show that robotic surgery is better than traditional surgery -- though it might be so purely due to its laparoscopic nature.

Hold
Given the pros and cons of Intuitive Surgical right now, you might want to just hold off. You might want to wait to see additional procedures start being performed on the company's machines. You might want to hold out for a more compelling stock price at which to buy, too. After all, there are plenty of compelling stocks out there with more certain futures.

The verdict
I actually already own shares of Intuitive Surgical. I plan to hang on to my shares, ideally for the long term. Count me in on buying into the "buy" arguments on Intuitive's future.

If you're looking for a blockbuster stock, our analysts think they've found a very promising company. Check out our special free report, "Discover the Next Rule-Breaking Multibagger," to learn more about it.

The article Buy, Sell, or Hold: Intuitive Surgical originally appeared on Fool.com.

LongtimeFool contributorSelena Maranjian,whom you canfollow on Twitter,owns shares of Hansen Medical, Johnson & Johnson, Intuitive Surgical, and MAKO Surgical, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Intuitive Surgical, MAKO Surgical, and Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of Johnson & Johnson, MAKO Surgical, and Intuitive Surgical.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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