Specialty Industrial Machinery company Intuitive Surgical is standing out today, surging to $455.01 and marking a 9.3% change. In comparison the S&P 500 moved only -1.0%.
ISRG currently sits within range of its analyst target price of $448.85, which implies that its price may remain stable for the near future.
Surprisingly, analysts give the stock an average rating of buy, which shows that they believe prices could continue to move. Over the last year, Intuitive Surgical shares have outperformed the S&P 500 by 19.8%, with a price change of 40.6%.
Intuitive Surgical, Inc. develops, manufactures, and markets products that enable physicians and healthcare providers to enhance the quality of and access to minimally invasive care in the United States and internationally. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
Intuitive Surgical's trailing 12 month P/E ratio is 78.2, based on its trailing EPS of $5.82. The company has a forward P/E ratio of 61.7 according to its forward EPS of $7.37 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the health care sector has an average P/E ratio of 27.61, and the average for the S&P 500 is 28.21.
ISRG’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Intuitive Surgical, we obtain a PEG ratio of 5.27, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of Intuitive Surgical's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
ISRG's average gross profit margins over the last four years are 67.8%, which indicate it has a potential competitive advantage in its market. These margins are declining based on their four year average gross profit growth rate of -1.0%.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Intuitive Surgical's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 1,813,800 | 1,064,200 | 749,600 | -21.79 |
| 2022 | 1,490,800 | 532,400 | 958,400 | -45.23 |
| 2021 | 2,089,400 | 339,500 | 1,749,900 | 53.06 |
| 2020 | 1,484,800 | 341,500 | 1,143,300 | -2.5 |
| 2019 | 1,598,200 | 425,600 | 1,172,600 | 19.39 |
| 2018 | 1,169,600 | 187,400 | 982,200 |
- Average free cash flow: $1.13 Billion
- Average free cash flown growth rate: -7.0 %
- Coefficient of variability (the lower the better): 0.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, ISRG is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Intuitive Surgical's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 10, so the company's assets may be overvalued compared to the average P/B ratio of the Health Care sector, which stands at 3.69 as of the second quarter of 2024.
Intuitive Surgical is by most measures overvalued because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and positive cash flows with a downwards trend. The stock has mixed growth prospects because it has a an inflated PEG ratio and decent operating margins with a stable trend. We hope you enjoyed this overview of ISRG's fundamentals.
