Better Buy: Intuitive Surgical, Inc. vs. Medtronic

By Markets Fool.com

Image source: Intuitive Surgical.

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Intuitive Surgical (NASDAQ: ISRG) and Medtronic (NYSE: MDT) both make advanced medical devices, but they have plenty of differences. Intuitive Surgical has one primary core product with its da Vinci surgical system. Medtronic claims a diverse list of products from ablation systems to vascular compression systems. Over the last 10 years, Intuitive's stock has soared over 500%. Medtronic's shares increased nearly 70% during the same period.

But which of these two medical-device stocks is the better choice for long-term investors now? Here's how Intuitive Surgical and Medtronic compare.

The case for Intuitive Surgical

If I had to pick only one reason to buy Intuitive Surgical, it would be the company's recurring revenue model. Instruments and accessories sales accounted for over half of total revenue in the first six months of 2016. Annual service agreements generated nearly 20% of total revenue. That's more than 70% of total revenue coming in the door without selling a single new system.

Of course, Intuitive Surgical does sell new systems. In the first half of this year, the company sold 240 new da Vinci systems, up from 217 in the prior-year period. In total, Intuitive made $350.6 million in system sales during the period.

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The company's growth should continue for two major reasons. First, more and more procedures are being performed using da Vinci. Intuitive reported 16% year-over-year growth in procedures. In particular, Hernia repair and colorectal surgeries increased.

Second, Intuitive Surgical continues to expand outside of the U.S. Procedure growth in other countries is outpacing growth in the U.S. One of the company's key goals is to increase its presence in Europe and Asia. Obtaining importation authorizations in China is proving a challenge, however.

The average estimate of Wall Street analysts is that Intuitive Surgical will grow earnings by 14% annually over the next five years. That's a lot higher than the company's annual earnings growth over the past five years, a period in which shares increased by 80%.

The case for Medtronic

Medtronic isn't experiencing the same level of growth as Intuitive Surgical. Actually, the company's revenue and earnings decreased slightly in the quarter ending June 30 compared to the prior-year period. That decline came with an asterisk, though, as the prior year included an extra week.

Better results could be ahead, though. Medtronic's cardiac and vascular group business segment should benefit from the anticipated approval and launch in early 2017 of theEvolut R XL heart valve. The segment also expects growth from itsClaria MRI CRT-D system andinsertable cardiac monitorReveal LINQ.

Emerging markets look like a growth opportunity for Medtronic's minimally invasive therapies group. In particular, the company's "reposable" (part reusable, part disposable)ReliaMax reusable stapler seems to be a good fit for customers in emerging markets. A couple of new product launches planned for fiscal year 2017 should also help.

Medtronic's restorative therapies group has been hurt by weakening pain therapies sales, but the outlook appears to be brighter for spine products and brain therapies. The business segment should benefit from the launch of several new products, including the Prestige LP artificial cervical disk, which was approved by the FDA in July.

The company's smallest business segment, diabetes products, was the only segment to report sales growth in the most recent quarter. Although that growth was small (2% year over year), two next-generation insulin pump systems, the MiniMed 640G and 620G, should drive higher sales in the future. Also, UnitedHealth Group's selection of Medtronic as itspreferred in-network provider of insulin pumps is a definite plus.

Medtronic also offers investors something that Intuitive Surgical doesn't: a nice dividend. The company's dividend yield currently stands just over 2%. Medtronic has increased its dividend payment for 39 consecutive years.

Better buy

Both Intuitive Surgical and Medtronic are solid companies with good products. Only one of the two companies, however, appears to have a pathway to exceptional growth. That's why Intuitive Surgical is my pick as the better buy between these two medical-device makers.

Intuitive seems to have moved past recent worries about the safety and value of its da Vinci systems. I think the company should be able to achieve its goals of procedure growth and international expansion.

My biggest concern about Intuitive is that the stock trades at a premium valuation. Any blip could cause a major pullback. Over the long run, though, I think Intuitive Surgical should remain a winner -- just as it has for years.

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Keith Speights has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool owns shares of Medtronic. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.