Wall Street Just Doesn't Understand This Stock


Sometimes being good just isn't good enough.

Just ask shareholders of Intuitive Surgical (NAS: ISRG) , the manufacturer of the da Vinci robotic surgical system, which is used in a myriad of surgical procedures. The company, which has made a habit of crushing Wall Street's profit projections, absolutely destroyed them once again last night.

For the quarter, Intuitive Surgical noted growth in every single business segment and region -- including Europe. Fourth-quarter revenue jumped 28% to $497 million as the company sold 152 da Vinci systems as compared to 124 in the year-ago period. The steady demand for Intuitive's products netted the company a quarterly profit of $3.75 per share. Wall Street was looking for the company to report a profit of $3.33 on $482 million in revenue.

This was simply another shellacking of analyst's estimates by Intuitive Surgical, which has trounced expectations for 11 consecutive quarters. The problem is that neither Main Street nor Wall Street really understands the strength behind Intuitive's business -- and that's the primary reason for today's drop.

It wasn't as if Intuitive Surgical, which trades at an aggressive 39 times trailing-12-month earnings, grew revenue by double-digits and missed the mark. Google (NYS: GOOG) , which is itself often misunderstood, widely missed sales and profit forecasts last night and is paying the price for it. Intuitive crushed estimates on the top and bottom line and is getting creamed just the same.

Why? Because the company's 2012 forecast of 17% to 19% top-line growth was essentially in line with what Wall Street was expecting and down from last year's 24%. Intuitive, which is very much like Apple in that it tends to undercut in its forecast what it is fully capable of, and then crushes estimates when it finally does report, also hinted that due to an increase in benign hysterectomies and short-term elective procedures, it could experience greater seasonality in its historically slower first-quarter figures than normal. Apparently, this is enough to spook the Street ... but not me.

Intuitive ended the quarter and fiscal 2011 with $2.17 billion in cash and investments, no debt, and the authorization to repurchase up to $568 million worth of its stock as it sees fit. The average selling price of its da Vinci surgical system is expected to keep rising in the near term and the number of procedures are expected to climb 24% to 26% over the 360,000 performed in 2011. Again, this doesn't sound like a company in trouble to me.

The other way to look at this is: What are your alternatives? If you think Intuitive's growth is slowing and a forward P/E of 28 is just too much to pay, you could always turn to MAKO Surgical (NAS: MAKO) whose RIO system is pioneering hip and knee replacements, or Hansen Medical (NAS: HNSN) , which has robotic technology used in catheter placement. The shortfall of both of these companies is that they aren't profitable. Still industry fledglings, neither has ever turned an annual profit, and it could be years before they do.

On the other side of the coin, Intuitive Surgical is turning a hefty profit now and adding to its impressive cash balance daily. You could always look at traditional medical device companies, but with many sporting single-digit growth rates, you'd almost always be better off sticking with Intuitive Surgical.

Wall Street just doesn't get Intuitive Surgical and I feel that you need to use dips like we're witnessing today as buying opportunities. I'm so confident that Intuitive Surgical will reward investors over the long run that I'm going to make a CAPScall of outperform on Intuitive Surgical so you can ultimately hold me to my analysis. The question now is: Would you do the same?

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At the time thisarticle was published Fool contributorSean Williamshas no material interest in any other companies mentioned in this article. He usually knows a good thing when he sees it. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong. The Motley Fool owns shares of Google, Apple, and MAKO Surgical.Motley Fool newsletter serviceshave recommended buying shares of Intuitive Surgical, Google, Apple, and MAKO Surgical. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat never looks a gift horse in the mouth.

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