Intuitive Surgical Catching My Eye

Intuitive Surgical was a very hot stock on par with the likes of HANS in the last bull market, but it seems that the stock price has come down to earth.  After hitting a 52 week low of $84.86 it has bounced back.  Even in this miserable environment, with hospitals cutting back on budgets they managed to sell 68 Da Vinci robotic units in Q1, down from 76 last year.  My thought is that hospitals probably can't change their budget on a dime, and that the decline in sales will come later in the year.  However, even if that is the case ISRG has sold enough units that the sales of replacement parts could keep them afloat through the recession.

Some highlights from ISRG's Q1 2009 Earnings Call transcript:

• "Total recurring revenue grew to $121 million, up 36% from prior year comprising 58% of total revenue."
• "First quarter instrument and accessory revenue was $79.5 million, up 29% compared with $61.9 million for the first quarter of 2008 and down 3% compared with $81.6 million in the fourth quarter of 2008. The change compared with the first quarter of last year was driven by the 60% procedure growth partially offset by the revenue deferral of $2.1 million and lower instrument and accessory revenue per procedure."
• "The amount of instrument and accessory revenue we realized per procedure including initial stocking orders and adding back the deferred revenue of $2.1 million was approximately $1800 per procedure, down approximately $200 per procedure compared to the fourth quarter and down approximately $400 per procedure compared to the last year."
  
• "In March, the company delivered the $150 million to Goldman and received and retired 1.4 million shares which is the minimum number of shares due under the program."
  
• "During the first quarter we sold 66 da Vinci systems, 44 in United States, 17 in Europe, and 5 into rest of world markets. A total of 6 system sales were part of trade-up transactions. The net 60 new system installations brings to 1171, the cumulative number of da Vinci systems worldwide; 863 in the US, 211 in Europe, and 97 in rest of world markets..."
• "We ended the first quarter of 2009 with cash and investments and $822 million, down $80 million from December 31, 2008. The decrease reflects $150 million used to buy back and retire shares and $27 million invested in fixed assets intellectual property partially offset by $79 million in gross cash flow from operations."
  

I especially like that they knew when the time was right to issue a share repurchase program.  Many companies make the mistake of repurchasing shares at the peak of the bull cycle.  They also note in the conference call that they may retire up to $150 million more in shares between now and June, and that the effect of the 1.4 million retired shares will be realized in the second quarter.

They also suspended guidance for instrument and accessory growth as well as system sales.  So basically, they suspended all guidance since that's the majority of their business.  ISRG is a very volatile stock, but they will survive this downturn since they have a monopoly on robotic surgery.  600 patents is quite a moat, and they are not benign to acquiring other start-ups to get the technology they need.  I think ISRG's valuation becomes very attractive below $100, and will be thinking of selling a put with a strike of 90 or 100 and expiration 3 - 8 months out on any weakness in ISRG's price below $120.

Disclosure: no position in ISRG