ISRG.......
Intelligent, gorilla game type of analysis from New Paradigm Thread on the Fool. I'm reproducing it here, as a compliment to its author, and because of his gorilla game references. Apollo
"ISRG is a Rule The World (RTW) stock
It's been a long time since a new RTW stock has shown its face around here (that I understand) and I'm willing to grant ISRG that status. Here is why.
I'm reminded of my first PC, an Apple II actually, which I stared using in 1978 or so. Life has been better ever since. Before word processors I had to rely on physical cutting and stapling and on typists. Turn around time was slow and often the typist would introduce new errors while fixing the old. Replacing a typist with a silent machine that does not take vacations, ask for raises and is available 24/7 changed my life. I'm not sure if the word processor made me a better or worse writer but it sure increased my output. Would I ever go back to handwriting or dictating? Never! And, of course, word processing is just one thing that PCs help me with. I can now do spreadsheets, drawings, photo albums and websites among others. I doubt anyone was thinking of using Apple IIs for websites back in 1978. To say that PCs are disruptive technology is an understatement. Besides typists, they have disrupted draftsmen, slide rules, movies, music, mail, telephony, investing, town meetings and now surgery.
Intuitive Surgical is not a health care company in the traditional sense. It is a computer/robotics company in the health care arena and all the benefits of the economic law of increasing returns apply to it.
The distinguishing feature of companies that fit into The Gorilla Game is "architecture," more specifically "open, proprietary architecture." Intuitive Surgical has "proprietary architecture" but it is most definitively "closed" because they do not allow any foreign tools to be attached to their machines. While this reduces the number of players in the value chain it increases Intuitive Surgical's percent of revenue from the value chain. Simply said, it's a razors and blades business but the razors are far from being a commodity item. Already in 2004 recurring revenues (blades) made up around 42% of revenue. My spreadsheet tells me that by 2015 recurring revenues (blades) will be around 74% of revenue. In other words, Intuitive Surgical will be a toll taker in the best Buffettian tradition.
While Intuitive Surgical does not fit the gorilla profile it most certainly fits the law of increasing returns. The surgical robotics field started with many players including IBM, SRI, and Computer Motion and Intuitive Surgical won the game. Intuitive Surgical bought Computer Motion getting their patent portfolio and they have discontinued the competing products Zeus and Socrates. Intuitive Surgical has exclusive license deals with IBM and SRI and probably with others. I believe that they have a three way moat:
- The first moat is time to market. They are the only player in the field and they control lots of patents with expiration dates around 2012 and 2016. This will allow them to operate in a sheltered mode for at least 6 to 10 years.
- The second moat is switching costs. If during the next 6 to 10 years da Vinci is the only surgical robot available, by the time a new one shows up, all the doctors practicing robot surgery will be da Vinci users. They will not want to retrain for a new robot unless it has compelling (disruptive) advantages. Nothing is visible on the horizon at this time.
- The third moat is regulatory approval and payment approval. The FDA will slow down any and all future competitors and payors will have to be convinced to pay for the new procedures. Without payor approval the best equipment will be limited to experimental use.
The only things that I see as disruptive to Intuitive Surgical are clinical solutions, i.e. drug treatments for ailments currently best treated with surgery.
I see three main advantages for Intuitive Surgical:
- Less invasive surgery which means less suffering for the patient
- Better interventions from enhanced vision/movement control
- Shorter recovery time which means less hospital/drug costs for the patient
My only issue with the stock is price which at a P/E of 75 is, well, "pricey." It would seem that the past earnings surprises (77.8%, 31.6%, 90.5%, 89.7%) are what pushed up the stock price so but now analysts have caught on and they increased their estimates from 29¢ for September to 49¢ for December. Unless ISRG can surprise again, the street is likely to be "disappointed" and the stock is likely to tumble. Over time the stock should appreciate nicely even as the P/E drops to more reasonable levels.
In conclusion, this looks like a buy on dips and hold for 6 to 10 years kind of stock.
Denny Schlesinger
No position at this time." |
