The 1 Alarming Detail Intuitive Investors Should Be Aware Of

On Tuesday night, Intuitive Surgical (NAS: ISRG) came out with earnings for the third quarter of 2012. Overall, results were fairly positive, but read ahead to find out which detail -- somewhat buried in the earnings presentation -- that should be front and center on every investor's radar. Read all the way to the end and I'll also offer up access to a special free report on the shocking can't-miss truth about your retirement.

First, a quick review of the quarter
Based on a cursory glance at the numbers, this was a solid earnings report. Revenue grew by 20%, and earnings per share jumped by 50% -- though it would've been a more reasonable 19% without a one-time tax benefit.

The company has three different revenue-producing divisions:

  1. Instruments: the disposable pieces a hospital has to order for every procedure performed using the da Vinci surgical robot. This segment showed growth of 24% over the same time last year.

  2. Systems: the actual sales of da Vinci systems. The company sold 155 da Vinci systems in the third quarter, 22 more than last quarter. That helped push revenue 17% higher.

  3. Service: the general upkeep required to keep the da Vinci robots functioning over time. As the installed base of systems grows, so too will this segment. For the quarter, revenue was up 22%.

Throwing these numbers at you is nice and good, but to get a better picture for where Intuitive got its money over the past quarter, here's a visual breakdown of the three segments.

So, where's the problem?
Overall, Intuitive didn't reach its expectations for the number of procedures performed. There were two reasons for this. The first was continued weakness in Europe. As fellow Fool Keith Speights pointed out, this was to be expected and wasn't a huge surprise for the company. In fact, fellow medical device company Edwards Lifesciences (NYS: EW) experienced much the same with their European division last quarter.

The real cause for concern came from this tidbit of the earnings call. Prostatectomies -- which along with gynecological procedures make up the bulk of operations performed with da Vinci -- were down because of "conservative PSA [Prostate Specific Antigen] screening protocols and a change in treatment recommendations for low-risk cancer patients away from definitive treatment," according to management.

Let's back up here for a second and think about this. Intuitive Surgical's financial success is based upon its ability to provide a safer alternative to routine procedures. If the medical community thinks its necessary to change our approach to treating prostate cancer, it could definitely have repercussions for Intuitive.

The medical community (hopefully) makes its decisions based on what's best for patients, not what's best for any individual company. Management expressed as much later in the conference call, when CEO Dr. Gary Guthart acknowledged that it would be difficult to tell what direction the medical community might go and that the company needs to focus on what it can control.

What am I doing?
This is important news for me personally. Intuitive has a high spot in both my retirement and growth portfolios, and I called the company a best buy just last month. Taken together, the company accounts for roughly 7% of my stock holdings.

So am I selling based on this news? Not any time soon.

As Keith pointed out in his earnings take, Medtronic (NYS: MDT) and Boston Scientific (NYS: BSX) look much cheaper than Intuitive right now. And even though Accuray (NAS: ARAY) has a sky-high P/E, that's because the company just became profitable. As it is, Accuray grew revenue by 84% in the first half of the year.

Taking the new numbers into consideration, Intuitive is now selling for about 36 times earnings. That doesn't make the company a screaming buy -- given this new information. But there still isn't a strong argument to be made for selling the company.

As CEO Guthart said, there's little the company can do to predict prevailing medical approaches to procedures. There are still many opportunities out there for the da Vinci in other procedures. And I appreciate Guthart's honest appraisal of the situation.

One of the reasons Intuitive is on my radar is because of the place it has in my retirement portfolio. Making the right financial decisions today makes a world of difference in your golden years, but with most people chronically undersaving for retirement, it's clear that not enough is being done.

Don't make the same mistakes as the masses. I urge you to learn about The Shocking Can't-Miss Truth about Your Retirement. It won't cost you a thing, but don't wait, because your free report won't be available forever.

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Fool contributor Brian Stoffel owns shares of Intuitive Surgical. The Motley Fool owns shares of Intuitive Surgical and Medtronic. Motley Fool newsletter services recommend Intuitive Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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