Intuitive Surgical May 2014 Quarterly Valuation $ISRG

Intuitive_Surgical_LogoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies with a High Beta.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Intuitive Surgical (NASDAQ:ISRG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Intuitive Surgical, Inc. (Intuitive) designs, manufactures and markets da Vinci Surgical Systems and related instruments and accessories. A da Vinci Surgical System consists of a surgeon’s console, a patient-side cart and a high performance vision system. The da Vinci Surgical System translates a surgeon’s natural hand movements, which are performed on instrument controls at a console, into corresponding micro-movements of instruments positioned inside the patient through small incisions, or ports. The da Vinci Surgical System is designed to provide its operating surgeon with intuitive control, range of motion, fine tissue manipulation capability and three dimensional (3-D), high-definition (HD) vision while simultaneously allowing the surgeon to work through the small ports of MIS. In January 2014, Luna Innovations Inc announced the sale of its shape-sensing technology for medical applications to Intuitive Surgical, Inc.

ISRG Chart

ISRG data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $369.74
MG Value $499.40
MG Opinion Undervalued
Value Based on 3% Growth $188.08
Value Based on 0% Growth $110.26
Market Implied Growth Rate 10.00%
Net Current Asset Value (NCAV) $40.10
PEmg 28.50
Current Ratio 4.52
PB Ratio 3.88

Balance Sheet – 3/31/2014

Current Assets $2,077,600,000
Current Liabilities $459,500,000
Total Debt $0
Total Assets $4,194,200,000
Intangible Assets $259,900,000
Total Liabilities $537,600,000
Outstanding Shares 38,400,000

Earnings Per Share

2014 (estimate) $9.12
2013 $16.73
2012 $15.98
2011 $12.32
2010 $9.47
2009 $5.93
2008 $5.12
2007 $3.70
2006 $1.89
2005 $2.51
2004 $0.67

Earnings Per Share – ModernGraham

2014 (estimate) $12.97
2013 $13.96
2012 $11.64
2011 $8.75
2010 $6.38
2009 $4.50


Intuitive Surgical qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns with the lack of dividend payments and the high PEmg and PB ratios.  The Enterprising Investor’s only concern is the lack of dividend payments.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods, should feel comfortable conducting further research into the company and its competitors through a review of ModernGraham’s valuation of Johnson & Johnson (JNJ).  From a valuation side of things, the company appears undervalued after growing its EPSmg (normalized earnings) from $6.38 in 2010 to an estimated $12.97 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 10% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value above the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Intuitive Surgical (ISRG)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Intuitive Surgical (ISRG) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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