Intuitive Surgical (ISRG): A “Good Company” Stock for 2011

TK All-Star posted on 12/20/10 at 09:40 AM

Alan Brochstein applies his hallmarks of a good fundamental company to a specific stock, ISRG

Welcome back to part two in this mini blog series about “good company” stocks. In my last post, 10 Hallmarks of a Good Company, I outlined what I consider to be the most important fundamentals to check out on any stock. I’ll be applying those principles to a specific stock idea for 2011, Intuitive Surgical (ISRG).

I also explained the difference between good companies and good stocks. A value investor’s goal is to find a truly good company that the stock market has largely ignored. 
One “Good Company” Example: Intuitive Surgical

Let’s dig into specifics. ISRG is a maker of robotic surgical equipment (Da Vinci).
I don’t have the company in my Top 20 Model at this time, but it’s my watchlist. I’ve watched this since 2004, have invested in it several times, and think the stock looks promising for 2011.

What makes ISRG good?  

On the quantitative metrics, ISRG stands out for its strong balance sheet, heavy commitment to R&D and solid generation of free cash flow. The company’s qualitative aspects, though, set it apart in my opinion. The company is virtually a monopoly on its space, and management is excellent. ISRG operates as a rare “triple-win” in healthcare: 1. bettering the lives of patients (and doctors) while 2. improving the bottom-line for hospitals and 3. the insurance companies.

From the chart above, we quickly see one of the first signs of a “good company”. Notice that ISRG made an all-time high AFTER the 2008-2009 crash earlier this year, and that the earnings (depicted in the top panel) have risen steadily. 

In the middle panel, we see that the valuation as measured by Enterprise Value (# shares outstanding X price less cash plus debt, or a full company value) relative to EBITDA (trailing four quarters of earnings before interest expense, taxes, depreciation and amortization) is low historically. I calculate it to be a bit lower actually, as my analytical system excluded the LT investments of $640mm. Looking at the projected 2010 EBITDA, the ratio is below 15X. In fact, despite strong growth expected, it’s about as low as it has been since the company became profitable in 2005. 15X is an above-market valuation, but it’s not surprising given the quality of the company and its growth prospects. 

In the bottom panel, we see just how profitable this company has been, a sign of their excellence. Bulls and bears can debate what the “right” P/E ratio is, but I tend to think 20X adjusted for cash would be a steal and 30X would be expensive. The P/E ratio, looking to 2011 consensus estimates of 19% growth and adjusted for cash and investments, is 21X.

That’s it from me, folks. I hope that you and your families have a happy, healthy 2011!


Alan Brochstein

Disclosure:  No position in the stock mentioned

In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.

Alan Brochstein maintains a cross-marketing relationship with TradeKing.

Posted by TK All-Star on 12/20/10 at 09:40 AM


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