Did the Pentagon Just Save Intuitive Surgical?

Artist's rendering of Intuitive's newest machine, the daVinci Xi. Source: Intuitive Surgical.

For robotic surgery specialist Intuitive Surgical , things are not working out exactly as planned. After growing its stock price nearly 14 times from its 2005 IPO through early 2013, and reporting near-uninterrupted sales and earnings growth for much of that decade, Intuitive Surgical entered into a sophomore slump last year. But stay tuned -- there's good news just around the bend.

Trouble in paradiseFor 18 long months, investors in Intuitive Surgical have been treated to a ceaseless drumbeat of bad news:

  • Four straight quarters of year-over-year declines in cash from operations (according to data from S&P Capital IQ).
  • Six straight quarters of year-over-year declines in GAAP earnings.
  • Six straight quarters of falling revenues.

And yet... actually, scratch that last bit. Intuitive Surgical finally caught a break last quarter, when Q4 earnings showed a modest, 6% uptick in quarterly revenues. The company's still fighting the twin headwinds of negative press surrounding the safety and effectiveness of robotic-assisted surgery as well as thepressure from Obamacare bean counters urging hospitals to curtail costs (and, by extension, buy fewer million-dollar robots). But despite these challenges, Intuitive Surgical says sales of its newest surgical platform, the daVinci Xi, are gaining traction (97 units sold in Q4). In fact, units sold grew more than 50% in each of the past two quarters.

What's more, the daVinci systems that are already "out there" are being used more and more often. Every time one of its robots gets used, Intuitive Surgical gets to sell hospitals more "consumable" parts -- "blades" to the daVinci "razor." That's why it's such good news that in Q4, daVincis saw a 33% rise in their use in "General Surgery" procedures in the U.S., according to CEO Gary Guthart.

And now, it seems the military likes it, too.

And a round of applauseLast week, in a pretty startling development, the U.S. Department of Defense announced a huge order of daVinci robots from Intuitive Surgical. In a deal valued at $430 million over five years, the DoD picked Intuitive Surgical out of a field of 35 bidders (who even knew there were that many companies building surgical robots?) to supply Army, Navy, Air Force, Marine Corps, and federal civilian agencies with an unspecified number of surgical robotic systems, instruments, accessories and upgrades.

According to the DoD notice, this was the single biggest order the Pentagon has placed with Intuitive Surgical -- ever. Indeed, relative to the last time DoD placed an order with Intuitive Surgical (a $34 million parts order placed in September 2012), March's contract was bigger by a factor of 12.

What it means going forwardAccording to Intuitive Surgical's most recent 10-K filingwith the SEC, at last report, "no one customer accounted for more than 10% of [the company's] revenue during the years ended December31,2014,2013, and2012." But with the Pentagon promising to buy roughly $86 million worth of daVinci robots and parts annually over the next five years, the DoD will soon account for 4% of Intuitive Surgical's business.

All of a sudden, the military is one of this company's biggest customers -- and with Intuitive Surgical continuing to pull down 30% operating profit margins, the military is also one of its most important sources of profit.

What's truly key to investors in Intuitive Surgical, though, is that thanks to the Pentagon contract, analyst estimates of long-term profits growth (pegged at just 6.6% annually over the next five years by Yahoo! Finance) have just been turned on their head. Counting the new business from the Pentagon, Intuitive Surgical is much more likely to post profits growth in the 10%-per-year range.

And what it means to investors todayReacting to the Pentagon's news, investors first bid up Intuitive Surgical shares Tuesday. Crazily, though, these same shares sell today for less than they cost before the huge Pentagon contract had been awarded -- just $500 and change at the time of this writing.

Granted, at 45 times earnings, it's hard to call Intuitive Surgical shares "cheap." But for anyone who thought this stock was worth paying $500 a share for on 6% growth prospects last week, the shares should look much more attractive at the same price with prospects for 10% growth today.

The article Did the Pentagon Just Save Intuitive Surgical? originally appeared on Fool.com.

Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 298 out of more than 75,000 rated members.The Motley Fool recommends Intuitive Surgical. 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.

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