Shares of Intuitive Surgical (ISRG) - Get Report tumbled 6.7% to $492.57 Monday after a Canaccord analyst cut his price target on the robotic surgical products maker to $575 from $610. Analyst Jason Mills lowered his price target on the Sunnyvale, California-based company after it missed its first-quarter earnings target last week. He maintained his buy rating on the stock. The company reported net income of $306.5 million, or $2.56 a share, up from $287.6 million, or $2.44 a share a year ago. Adjust earnings came to $2.61 a share, missing Wall Street's guidance of $2.70 a share. Sales totaled $973.7 million, up 14.9% from a year ago. Analysts were looking for revenue of $975.3 million. Intuitive Surgical designs, manufactures, and markets da Vinci surgical systems, and related instruments and accessories. The systems transform the surgeon's natural hand movements outside the body into corresponding micro-movements inside the patient's body. The company said that worldwide, da Vinci procedures grew about 18% compared with the first quarter of 2018, driven primarily by growth in U.S. general surgery procedures and worldwide urologic procedures. Mills said in a note to investors that he thought the post-print pullback in the stock is a "gift to longs." He added that he would be an aggressive buyer of the company on weakness. Mills said the fundamentals of the business were "robust" in the first quarter and that he expects they will remain so going forward.<doc-sep>Stocks drifted mostly sideways in low volume Monday as investors looked forward to some closely watched earning reports this week. The Dow Jones Industrial Average (DJINDICES:^DJI) closed down and the S&P 500 (SNPINDEX:^GSPC) posted a small gain. A 2.6% jump in the price of crude oil boosted the energy sector. Today's stock market Index Percentage Change Point Change Dow (0.18%) (48.49) S&P 500 0.10% 2.94 As for individual stocks, Kimberly-Clark (NYSE:KMB) reported falling revenue and profit but managed to beat expectations, while Intuitive Surgical (NASDAQ:ISRG) posted a disappointing profit. Kimberly-Clark beats expectations in a tough environment Price increases and cost controls helped Kimberly-Clark beat expectations for its first quarter, and shares jumped 5.4%. Net sales fell 2.1% year over year to $4.63 billion and adjusted earnings per share dropped 2.9% to $1.66. Analysts were expecting the company to earn $1.54 per share on sales of $4.53 billion. Currency losses posed a 5% headwind to the company, so organic sales growth was 3%, led by 5% organic growth in personal care, the company's largest segment with $2.3 billion in sales. Sales in the consumer tissue business were $1.5 billion, with a 6% decrease in volumes canceling out 6% in net price increases for flat organic growth. Overall, the company had a 2% decline in volume with a 4% increase in pricing. Kimberly-Clark saw $135 million of input cost increases, which was part of the reason why gross margin fell 30 basis points to 33.5%. The company was able to find $115 million in cost savings, keeping the operating profit margin steady at 17.4% after it dropped significantly last quarter. Kimberly-Clark maintained its full-year outlook for 2% organic sales growth and EPS between $6.50 and $6.70. Intuitive Surgical misses on profit Robotic surgery specialist Intuitive Surgical missed profit expectations when it reported first-quarter results late last week as customers shifted from purchasing robots to leasing them, and shares fell 7%. Revenue increased 14.9% to $974 million, about what Wall Street was expecting. Non-GAAP EPS rose 7% to $2.61, below the analyst consensus of $2.70. Worldwide surgical procedures, which drive recurring revenue from disposable supplies, increased 18%. The company shipped 235 systems compared with 185 in the period a year ago, contributing to 13% growth in the installed base. What hurt profit for Intuitive was an increase in the proportion of trade-ins and a shift from ownership to leasing for a growing proportion of its customers. Trade-ins were used for 36% of system sales in the quarter, compared with 31% in Q1 last year. Lease transactions represented 33% of total placements, an increase from 29% last quarter and 23% in the period a year ago. The trend shift to leasing creates a future source of recurring revenue for Intuitive Surgical and reduces the volatility of systems revenue, but it also reduces profit in the current period, which is what investors fixated on today.<doc-sep>Intuitive Surgical's (NASDAQ:ISRG) systems were originally conceived of as tools to help military surgeons operate on soldiers from afar. While that particular application hasn't panned out, the company was the first to market with a robotic surgical system, and its daVinci machines have enjoyed a huge headstart on the competition. But recently, bigger players have entered the fray. The stock fell in the wake of its latest earnings report, but it still trades at an expensive valuation. All of this is to frame the debate: Is Intuitive Surgical stock still a buy? I won't bury the lede any deeper: I fervently believe the stock is a buy. And those aren't empty words, as shares of Intuitive Surgical account for 4% of my family's real-life holdings. But my stance on the stock is not without caveats and nuances. To get a better idea for what I mean, let's look closer at the the bear and the bull arguments for Intuitive Surgical. The argument against: high-priced and facing new competition The biggest knock against investing in Intuitive Surgical right now is its sky-high stock price. Before last week, shares had advanced almost 10,000% over the previous decade. Even after the recent slide, the company still trades at a hefty premium: Its price-to-earnings (non-GAAP) ratio currently stands at 44 -- about twice as expensive as the broader market average. Its price-to-free-cash-flow ratio is even higher, clocking in at 59. Its PEG ratio -- which factors in expected growth rates -- sits at 3.7. Technically speaking, a stock with a PEG of 1.0 is "fairly valued," so this makes Intuitive look very expensive. And then there's the competition. Medtronic is already a juggernaut in healthcare, and it is positioning a machine in direct competition with Intuitive's daVinci. Medtronic's acquisition of Mazor Robotics last year makes it an even more formidable competitor. Johnson & Johnson is also making bold moves in the space. Previously, it announced a partnership with Alphabet to form Verb Surgical. This year, it acquired privately held robotic surgical company Auris Health. Even if these companies don't steal market share from Intuitive Surgical overnight, its margins could be meaningfully compressed over time, as it will have to cut its prices to compete with new entrants. The argument for: solid financials, a wide moat, and optionality While competition is coming for Intuitive Surgical, there's something crucial to understand about this company: It benefits from both high switching costs and network effects. Let's unpack those advantages, starting with the switching costs. When a hospital decides to fork over $1.5 million for a new daVinci machine, it's a serious investment. Currently, there are over 5,000 such machines installed globally, and more than 40,000 doctors have devoted significant time to training on the daVinci platform. Switching to a competing product would not only mean all that money down the drain, but it would render all that training a waste of time. Furthermore, Intuitive benefits from a sneaky network effect. Each additional surgeon who uses the daVinci, and each patient they use it on, fortifies the overall platform. These slow-building effects are incredibly powerful. Here's how it works: As more and more doctors use daVinci, a growing number of them will tinker with the machine to develop new applications for its use (read: new procedures.) Intuitive will help doctors investigate these new procedures. Some will prove beneficial, and others will not. Over time, the company is building up an extremely lengthy list of possible procedures the daVinci can be used to perform. If only 10% of those possible procedures become "hits" for daVinci, that will still be enough to move the needle on Intuitive's bottom line. If those upsides aren't enough to convince you Intuitive deserves your cash, there's also this: Intuitive is increasingly becoming a model of financial fortitude. Currently, it's sitting on more than $5 billion in cash, it carries no long-term debt, and it has produced almost $1 billion in free cash flow (FCF) over the past year. The board also has authorized a $2 billion share buyback, which will boost the value of shares already held by investors. And if you're worried about margins falling due to the arrival of competition, know that Intuitive has been investing aggressively in research and development (R&D) for the past two years to find and chase new opportunities. My conclusion If you're enthralled by this worthy investment, a word of caution: Don't buy your entire position all at once. The stock is still expensive. Competition may soon start putting pressure on Intuitive. I think it's far more prudent to buy a "starter position" now, using about one-third of the total amount you'd like to eventually allocate toward Intuitive. Over time, you'll learn to keep cash reserves handy so you can take advantage of quick dips in the stock price, like the one we're seeing this week, to add to your position at a more attractive price. If the stock just keeps going up, you'll have some skin in the game at least. If not, you'll be glad you've got more to invest when the time is right.<doc-sep>Robotic surgery specialist Intuitive Surgical (NASDAQ:ISRG) reported first-quarter earnings this week. While growth in operations continued to increase at a very healthy pace, the company has also signaled that its business model is undergoing a notable change. What will that change mean for the future? It's likely that short-term profits will be traded for long-term market share. Read on to get the details. Intuitive Surgical results: The raw numbers Before we get to that business model shift, let's take a look at how the company performed on the headline numbers for the first quarter. Metric Q1 2019 Q1 2018 Year-Over-Year Change Revenue $974 million $848 million 15% EPS* $2.61 $2.44 7% No one likes to see earnings growing slower than revenue, but much of that is due to both the shifting business model and the buildup in the company's inventory (more on that later). Of the three major divisions the company has, here's how the breakdown in growth added up. Division Q1 2019 Q1 2018 Year-Over-Year Growth Instruments and accessories $552 million $460 million 20% Systems $248 million $235 million 6% Service $174 million $167 million 4% The big story here is the fact that worldwide procedures jumped 18% compared to the first quarter of last year. It's encouraging to see instruments and accessories -- which are driven almost entirely by procedure growth -- increase even more. Within the United States, procedures grew 17%, spurred by hernia and colorectal procedures, which have long been the growth drivers. On the former, CEO Dr. Gary Guthart said the company is still in the early innings of hernia procedure growth. Outside the U.S., procedures increased 21%, led by strength in prostatectomies. To put the track record of procedure growth in perspective globally, here's how the company has fared on that metric since 2014. During the earnings call, management also discussed growth potential in bariatric procedures in the United States. Investors should look for progress in the procedure in the quarters to come. System placements are set to change Last November, I predicted a notable shift in the way Intuitive places its daVinci robotic surgical systems in hospitals worldwide, which is starting to come to fruition. During the first quarter, Intuitive placed 235 systems, up a very healthy 27% from the same time last year. So why did systems revenue only jump 6%? The company has started offering alternative financing, primarily through operating leases and usage-based agreements. There's a notable trade-off here: The company records less revenue (and profit) from system placements quarter by quarter. But -- the thinking goes -- this will result in more systems being placed globally, because they become more affordable. Over the decadeslong time frame, growth in procedures is what really matters. And the larger the installed base, the larger the long-term opportunity. It's an approach management has no qualms about taking: One-third of all systems sold were under the umbrella of alternative financing. CFO Marshall Mohr said: "If it were my choice, I'd find that leases and the alternatives that we're providing customers are favorable to us and that it creates a recurring revenue stream, eliminate some of the volatility of system placement revenue. And I think, in the long term, it will enhance any type of upgrade cycle that might come along." Looking ahead There were three other announcements for the period that could start coming into play in future quarters: The FDA granted approval for Ion, the company's minimally invasive tool for lung biopsies. Approval was also given for IRIS, the company's augmented reality tool that gives surgeons greater visibility into the anatomy of patients being operated on. Approval was granted to use the daVinci Single Port for a specific type of neck surgery. Management had tightened the guidance for procedure growth for the quarter to a midpoint of 15% to 16%. Some on Wall Street may have been disappointed by this given that overall procedure growth came in at 18% -- implying a slowdown to come in the rest of the year. On that note, management said constraints with system placements in China, combined with a more conservative approach to women's health procedures, could factor in. It's worth noting, however, that Inuitive has a well-documented track record of underpromising and overdelivering by the end of the year.<doc-sep>
The stock market returned from a three-day weekend Monday morning, and investors seemed to be slow out of the gate to begin the week. Absent any substantial news on the geopolitical or macroeconomic fronts, market participants appeared content to look forward to earnings season kicking into full gear over the next couple of weeks. As of 11:30 a.m. EDT, the Dow Jones Industrial Average (DJINDICES:^DJI) was down 22 points to 26,537. The S&P 500 (SNPINDEX:^GSPC) was down less than a point to 2,905, but the Nasdaq Composite (NASDAQINDEX:^IXIC) posted a modest gain of 4 points to 8,002. Consumer products giant Kimberly-Clark (NYSE:KMB) didn't waste any time in seeing its stock vault higher, with investors reacting favorably to its latest quarterly results announced this morning. However, Intuitive Surgical (NASDAQ:ISRG) gave up ground as shareholders finally got a chance to respond after the surgical system developer and manufacturer released its own financial report late Thursday before the Good Friday holiday. Kimberly-Clark takes care of business Shares of Kimberly-Clark climbed 6% after the maker of Kleenex tissues and Huggies diapers reported its first-quarter results. Even though overall sales fell 2% from the year-ago period to $4.6 billion, Kimberly-Clark would have seen substantial top-line growth were it not for 5 percentage points of downward pressure from the strong U.S. dollar. Similarly, a slight decline in adjusted earnings compared to year-earlier levels was nevertheless better than what most investors had expected from the company given a tough economic environment in the industry. In particular, Kimberly-Clark saw good results in the personal care segment, where rising sales volumes in the North American market reflected gains in adult care and showed the positive impact of increased marketing efforts. Even though other areas, including consumer tissue and the company's professional segment, didn't see the same level of performance, investors weren't concerned about what they see as temporarily declines. CEO Mike Hsu celebrated the news, pointing out that Kimberly-Clark's efforts to boost selling prices in order to offset the rising costs of commodities that go into manufacturing the company's products have largely proven successful. At the same time, Kimberly-Clark found $115 million in cost savings during the period, and it remained on track with its long-term "K-C Strategy 2022" initiative to ensure it stays competitive and responds quickly to changing industry conditions. Intuitive Surgical feels the pain Meanwhile, shares of Intuitive Surgical were down 7% following the company's release of first-quarter results late last Thursday. The maker of the da Vinci surgical system said that it shipped 235 da Vinci units during the period, up from 185 systems in the year-ago period and bringing the total installed base to 5,114 systems. Procedure growth came in at 18%, with greater use in general surgery and urologic procedures. However, investors weren't entirely pleased with the financial numbers. Revenue was up 15% to $974 million, but adjusted net income of $312 million was higher by just 8% from the year-ago quarter. Those who've watched Intuitive Surgical for a while aren't nearly as concerned about the bottom-line sluggishness. After all, spending on international expansion, new innovation, and adding features to existing systems is a smart business move that will help Intuitive Surgical prosper over the long run. Moreover, with new products having gotten the go-ahead from the U.S. Food and Drug Administration, Intuitive Surgical will have multiple avenues to drive long-term growth. It might take a while to realize its full growth potential, but Intuitive Surgical is moving in the right direction -- even if shareholders aren't showing it with today's move.