Intuitive Surgical (ISRG) Fundamental Analysis

Intuitive Surgical (NASDAQ: ISRG) is the maker of the breakthrough da Vinci Minimally invasive surgical machines mainly being used in the United States. It is a small to mid cap (comparatively) with a market capitalization of USD 10.5 billion, large by Singapore standards, small by US'.

Minimally invasive surgery is a big thing in the surgical field now due to better success rates, less human errors, faster recuperation time, less scars, less infections etc. than normal surgery.

The da Vinci surgical system is used by more than 1,500 hospitals worldwide; mainly in the United States though.

The FDA has cleared the da Vinci system for thoracic(chest), cardiac(heart),  urologic, gynae, paediatric and otorhinolaryngologic (ENT) surgery in the States.

It is used in world renowned hospitals like Johns Hopkins medical school hospital, New York University medical center, Massachussetts General Hospital, Mayo clinic and locally in SGH and Mt. Elizabeth. 

You might remember it being mentioned in ST a couple of years back.

An example of minimally invasive surgery would be removing ovarian cysts through the belly button as done at KK W&CH, or repairing torn rotator cuffs.

The info below has been taken from the US SEC website. 

1.) History of Consistently increasing sales, earnings and cash flow
Massive Sales growth from 2009 to 2010. Risen a staggering 25% from 2009 to 2010, and COGS has risen by about the same percentage.
Earnings have increased by a huge 60% from last year.
Cash flow has almost doubled from the same period last year, from 200 million USD to 380 million USD.


2.) Good competitive advantage
The da Vinci surgical system is protected by a multitude of patents, plus, there aren't any competitors now.
Even if there's a new upstart, the HUGE switching costs for Hospitals (a few million dollars) will ensure it's economic moat.

The davinci system also has many instruments which are disposable after every surgery, much like a needle is one use only, and a substantial part of it's growth has come out of sales of complementary instruments (37% of total sales). You can compare it to a razor blade and it's handle, or an electric toothbrush and it's changeable head. Eventually, once more and more hospitals adopt this system, the instrument market might make up a sizeable part of revenue for ISRG.



In addition, surgeons, once familiar with a certain system, loathe to change and hence create a status quo which will benefit ISRG.


3.) Future growth drivers

The large baby boomer generation is getting along in age, and with age comes illness.
Greying of the world's developed nations will ensure the demand for surgery.
80% of DVS is in the United States, and other developed nations' hospitals will be future growth drivers for this system.
Deteriorating health amongst developed countries also provide growth.

5.) ROE above average
Return on Equity is about 17%, above average.

6.) Senior management staff are holding, buying the stock

Senior Management owns only 1% of stock, and institutional owners own 89% of stock.
Management have been selling the stock since Feb 2009, and have only recently been buying up the stock since November 2010.

7.) Debt Level


Debt is at a manageable USD 130 million level. Profit to date for 3Q 2010 has already been 260 mil, so debt is low.


When to Buy:
1.) Undervalued
This stock is close to 52 week lows, but PE ratio is at a high 30x, forward PE is 25x but with such phenomenal high growth rates which do seem sustainable for the coming 2-3 years, the PEG is at 1.25-1.5 times, which is pretty average for a high growth stock. 

2.) Stock price in consolidation phase/ uptrend

ISRG has been in a downtrend since April 2010, in fact, the stock chart is VERY nice, very uniform, predictable downtrend which would have found favour with short term speculators.
It looks like there's recently been a descending triangle, and moreover current stock price is at resistance.


My conclusion:


Exciting growth stock with low analyst coverage but high growth mutual fund ownership.
High valuations but it's to be expected for growth stocks as such.
Good company with good fundamentals, low debt, huge economic moat, very large growth drivers esp. with the greying of America and the industrialised western countries in years to come. (From 2012 to 2020, the baby boomers will be retiring en masse)

From forums and websites, Doctors and hospital workers have said good things and have good reviews for this system, which indicates customer support.

However, negatives include low insider ownership, overly specialised field (high tech surgery mostly done in rich countries), one product company and low-mid capitalization, and high valuations for stock.

One product company is probably the most concerning because what if one day a really great competitor comes up? Hence, should I buy this company, I will have a short holding period of probably 1-5 years.


Next Steps: Stock is currently at resistance, and even though I only want to buy around 3-6 shares (1 share is $269.00), every penny saved can't hurt right? Also, I'd wait for a consolidation period to occur and for this downtrend to cease before buying.


Target price for entering will probably be slightly higher than the 52-week low(USD246.05) at USD250 to USD 260.


Target holding period: 1-4 years, or when valuations are ridiculously high.

Sale of KeppelCorp Warrants, cessation of my short term trading for now

Today I sold off my KepCorp warrant for a tidy 4.37% after accounting for all brokerage fees. As I bought heavily into it, my absolute amount gained is pretty high. :)

Having said that, I bought the warrant on Wednesday and sold it off today. On Wednesday, I was showing a paper loss of about 8%, and today I realised a 4.37% gain. That's a 12.37% swing in just 20 hours of trading. What a difference a day makes.

I will be ceasing my speculation for now, at least until I am more familiar with Technical Analysis. Why do I say so?

1.) Playing with financial derivatives is very risky. As Warren Buffett puts it, "risk is not knowing what you're doing." I understand how warrants and options work, but maybe it's time for me to take a step back and understand more about TA and charting before I plunge into speculating again. Then, playing with warrants would be, by definition, less risky for me.

2.) The way I'm using TA is obviously wrong now.
Example in point:

My top earner: SembCorp Marine, which I held from 3/12 to 10/12, was in my understanding, bearing many traits of a bearish stock. In that period, RSI had negative divergence, MACD was showing negative divergence, PSAR was above the stock price, which were all bearish signs (or so I thought). Only Stochastics was showing an upward trend. With all the bearish signs showing, you'd expect the stock price to drop, but instead it rose slightly, and with my huge leverage, I earned a tidy sum.

My top loser, Neptune Orient Lines, which i held from 3/12 to 15/12, was in my understanding, bearing many traits of a bullish stock. In that period, PSAR was constantly bullish, MACD line was above the signal line AND both of the lines were above 0, Stochastics was showing blue line above the red, AND, both on an uptrend toward 80%, which I believed were bullish signs, and yet, the stock price dropped quite a bit, and I quickly stopped my loss. (which is a good thing, considering that I would have lost another 25% had I sold off today-NOL dropped again)

This leads me to the conclusion that:
1.) My TA is too simplistic and hence largely incorrect, AND/OR
2.) I'm interpreting the signs wrongly,
3.) I'm too caught up in the excitement and anxiety that I make rash decisions.

Hence, I will be ceasing my warrant trading at least until CNY. This is also to help me take a step back and not make rash decisions like buying warrants on a whim, and to analyse them closely before making a purchase. As I have been on leave the whole of last week, I've been waking up and reading the finance news before logging on to POEMS/sgx.com at 9am. Which is not a good sign.

I will also be using the few weeks to CNY to brush up on my TA, of which I am only somewhat familiar with MACD, Stochastics, RSI, Volume, Moving Averages, PSAR and Bollinger Bands.
I will of course look out for good stocks to buy. 
My current KIV Stock list:
1.) Dapai
2.) CapMallAsia
3.) SATS
4.) STI ETF (Thought I'm reluctant to buy into STI now, many of the stocks are pretty overvalued, like Genting, City Development, Jardine, DBS, Olam, SGX, ST Engineering and our favourite way to fly, SIA, with PE of 84x)
5.) First REIT (div yield of 9.5%)  


I have also just applied for an OptionsXpress Cash Trading account, which allows me to trade in the United States market with a MUCH lower commission rate (USD 14.95) than POEMS, and with no custodian charge.

I will be researching on the Standard and Poor's "dividend aristocrats", which are companies that have given rising dividends every year for >25 years running).
I am most interested in McDonald's, ExxonMobil, the Standard and Poor's S&P 500 ETF (Otherwise known as SPDRs-Standard and Poor's Depository Receipts) and of course, Berkshire Hathaway B shares.

Merry Christmas and a happy new year to all. :)