Better Buy: Intuitive Surgical, Inc. vs. Johnson & Johnson

By Brian Feroldi Markets Fool.com

More than a decade ago,Intuitive Surgical(NASDAQ: ISRG)launched its revolutionaryda Vinci system and forever changed the face of surgery. Meanwhile,Johnson & Johnson(NYSE: JNJ)has grown into a healthcare conglomerate over the past century and has created an enduring brand that millions turn to when they get sick. These facts make it easy to understand why both companies have been phenomenal long-term investments. But which company is the better bet for new capital today? Let's dig into the bull case for owning each.

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Image source: Getty Images.

The case forJohnson & Johnson

One of Johnson & Johnson's most attractive qualities is the company's extreme focus on diversification. Johnson & Johnson has been an acquisition monster for several decades and now boasts more than 250 operating companies in its empire. These companies sell thousands of products around the globe, allowing J&J to generate about half of its total revenue in international markets. In essence, J&J has morphed into a healthcare mutual fund of sorts.

Investors saw this diversification work its magic in the fourth quarter. J&J's saw its sales decline in two of its three major business segments -- consumer products and medical devices -- yet total revenue rose by 1.7% year over year. How? Shareholders can thank growth in pharmaceutical sales. New drugs likeDarzalex, Imbruvica, Xarelto, and Stelara continued to grow rapidly and more than offset the declines in older drugs such as Invega and Olysio. Since J&J's pipeline continues to be packed with potential, I think investors can expect this trend to continue for years to come.

A look at the company's history shows that its business model works. J&J has grown its dividend for 54 consecutive years, a remarkable achievement. Since the recent acquisition of Actelionis projected to grow the company's top and bottom lines for the foreseeable future, I like the odds that this streak will continue.

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Despite offering a predictable business and a good shot at posting modest bottom-line growth, J&J's shares can be purchased for less than 22 times trailing earnings. Throw in a market-beating dividend yield of 2.5%, and there are plenty of reasons for investors to warm up to this stock.

The case forIntuitive Surgical

Intuitive's da Vincisystem offers numerous benefits over traditional surgery. Studies show that procedures performed on a da Vinci require smaller incisions,lead to less blood loss, and are associated with faster recovery times. Those are attractive benefits that have driven mass adoption. As of the end of 2016, Intuitive's worldwide installed base of machines stood at 3,919. Better yet, surgeons performed roughly 750,000 da Vinci procedures last year, a 15% increase over the prior year. Those figures speak volumes about the popularity of the system.

What's brilliant about Intuitive's business model is that the company makes money every time a da Vinci procedure is performed. Every surgery requires the use of disposable instruments and accessories that cost between $700 and $3,500 per procedure. In addition, each machine requires the purchase of an annual service contract, driving another $80,000 to $170,000 in revenue per system each year. In total, these two recurring revenue streams pulled in more than $1.9 billion in revenue in 2016, which comprised 71% of the company's top line.

Looking ahead, Intuitive continues to appear built for growth. The company is seeing growing demand in a number of procedures such as hernia repair, colorectal surgeries, and general surgery. Intuitive is also constantly investigating new usesfor its machines and expanding its reach into new geographies.

When adding up all of the company's growth drivers, market-watchers expect Intuitive's EPS to grow by more than 12% annually over the next five years. However, with shares trading for more than 40 times trailing earnings, the markets arecertainly pricing in a lot of prosperity, which might not make shares a steal at the moment.

The better buy

While I'm quite bullish on Intuitive Surgical's future -- and I own a lot of the company's stock -- the value investor in me can't help feeling that Johnson & Johnson is the better deal today. Sure, J&J's earnings growth projections are lower, but so are the company's risk profile and P/E ratio. Those factors matter a lot when you're putting fresh capital to work. In addition, the S&P 500 is currently trading at a generous valuation, so when a correction inevitably occurs, growth stocks such as Intuitive will probably get hit much harder than J&J's. Throw in a dividend yield of 2.5%, and I think that J&J is the better buy.

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Brian Feroldi owns shares of Intuitive Surgical. The Motley Fool owns shares of and recommends Intuitive Surgical and Johnson and Johnson. The Motley Fool has a disclosure policy.