“Quality never goes out of style” is a brand slogan for Levi’s, the ever-popular jeans manufacturer. It also could be the slogan for investors with a medium- to long-term outlook. The idea has certainly worked for Warren Buffett (Trades, Portfolio).
One way investors can search for high-quality names is to look through the GuruFocus High Quality screener, a Premium feature. Only 28 stocks out of the many thousands available make it onto that list due to the strict criteria. You can read more about the criteria and uses of this screener here.
Intuitive Surgical Inc. (ISRG, Financial) is one of the few high-quality stocks that makes the screener list as of this writing. Let's take a closer look at this stock to see whether or not it truly deserves the "high quality" designation.
About Intuitive Surgical
Intuitive Surgical is generally associated with robotic surgery (because that's the business it operates), but in its 10-K for 2021, it defined itself more broadly: “Intuitive is committed to advancing minimally invasive care through a comprehensive ecosystem of products and services. This ecosystem includes systems, instruments and accessories, learning, and services connected by a digital portfolio that enables precision and control, seamless interactions and experiences, and meaningful insights to drive better care.”
It is best known for the da Vinci Surgical System, which is an advanced robotic system designed to “provide precise, powerful systems with high-performance vision extending care team’s capabilities to enhance minimally invasive care.”
Systems, which is the business segment that is home to da Vinci, is one of three segments through which the company reports. The other two are Instruments and Accessories and Services.
Competition
Intuitive faces competition in most aspects of its business. As it explains in its 10-K, “Our success depends on continued clinical and technical innovation, quality and reliability, as well as educating hospitals, surgeons, and patients on the demonstrated results associated with robotic-assisted surgery using da Vinci Surgical Systems and its value relative to other techniques.”
Some of the competitor names it included in the annual report are Asensus Surgical (ASXC, Financial) and Johnson & Johnson (JNJ, Financial). The following chart compares its stock price performance with those two competitors; as we can see, Intuitive Surgical has been the more solid performer over time, with higher volatility but also higher gains compared to Johnson & Johnson.
Fundamentals
Intuitive receives a very high GF Score of 97 out of 100, which means it has excellent fundamentals and a high chance to outperform based on the results of a historical study by GuruFocus.
The company gets a financial strength rating of 10 out of 10. it has neither short- nor long-term debt. The ranking is based on factors such as the amount of its debt and the Altman Z-Score of 35.03. What’s more, it sits on cash and cash equivalents of $4.319 billion. The phrase “fortress balance sheet” seems apt for Intuitive.
The Profitabilty gets a high score of 9 out of 10. It has industry-leading operating and net margins at 27.05% and 22.52%, respectively. It has been profitable every year for the past 10 years, with and above-average return on equity at 11.69% and an industry-leading return on assets of 10.26%. These returns are solid based on comparisons with medical devices and instruments industry medians.
Growth gets a rank of 10 out 10, based on its three- and five-year revenue growth rates, five-year Ebitda growth rate and the predictability of five-year revenue growth. Both revenue growth rates have been reasonably consistent and predictable. Five-year Ebitda looks about the same, and it, too, showed a dip in 2020 because of the pandemic (in the annual report, the company noted that there were fewer surgeries because of Covid-19). Earnings per share without non-recurring items dropped 23.60% in 2020 but made a good recovery in 2021. Free cash flow has been quite volatile, but over the past decade, it has grown by an average of 7.70% per year.
In terms of valuation, the GF Value rank is 7 out of 10. The share price at the close of trading on Dec. 20, 2022 was $262.33. Dividing that by the GF Value of $322.52 gives us 0.81. That’s below 1.00, which means the stock is undervalued. One might expect the GF Value rank to be higher given the GF Value chart rates it as modestly undervalued, but based on a GuruFocus historical study, stocks with this price-to-GF-Value ratio were not the top performers.
However, that’s the only valuation metric. As shown in the below chart, other metrics scream overvaluation:
The price-earnings ratio and the PEG ratio are also much higher than industry medians, both indicating overvaluation as well.
In terms of dividends and share repurchases, Intuitive does not pay a dividend, and since September 2014, it has issued more shares than it has repurchased. The number of shares outstanding peaked at 367.9 million in the fourth quarter of 2021; since then, it has fallen to 360.5 million. In the third quarter of this year, it spent $1 billion on buybacks.
Gurus
Intuitive is very popular among the gurus, with 15 of them holding positions at the end of the third quarter of 2022. The largest stakes were as follows:
- Ken Fisher (Trades, Portfolio) of Fisher Asset Management held 4,247,499 shares, representing 1.20% of the company’s shares outstanding and 0.60% of his fund’s latest 13F portfolio. He reduced his holding by 7.67% during the quarter.
- Baillie Gifford (Trades, Portfolio) owned 4,199,142 shares after adding 0.17% during the third quarter.
- Ray Dalio (Trades, Portfolio) of Bridgewater Associates held 652,224 shares after adding 8.86%.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Institutional investors shared the confidence of the gurus; they owned 78.79% of shares outstanding. Insiders held a modest amount at 0.2%.
Conclusion
Overall, I believe Intuitive Surgical easily earns its place on the High Quality screener list due to its exceptional fundamentals and strong record of growth. However, by some measures, it is also overvalued, despite the dip from its most recent highs.
