Intuitive Surgical Inc. Has Likely Found Its Next Big Operation, But Will It Matter?

Intuitive Surgical showed solid progress in procedures, but margins aren't headed where Wall Street wants. Photo: Intuitive Surgical.

Shares of Intuitive Surgical were down today after the company missed estimates for both quarterly earnings and revenue. But it wasn't all bad news for the specialist in robotic surgery. The company did a solid job of selling new systems, and has likely found its next big-time operation, but foreign currency exchanges and shrinking margins are holding the stock back.

System sales have stabilizedThe days of heady growth in system sales evaporated nearly two years ago. But with Intuitive placing 99 new daVinci robots in the first quarter -- up from 87 during the same period last year -- stability seems to have returned.

Even more encouraging is the fact that the new Xi system just gained regulatory clearance in Japan, one of Intuitive's larger Asian markets. During the first quarter, the company only sold one daVinci in the country, likely due to anticipation for approval and availability of the Xi. With pent-up demand for the Xi likely to pop in the current quarter, investors should expect a nice bump from Japan when the company reports its next quarterly earnings in July.

The next big procedure?The dramatically slower growth -- and sometimes contraction -- of U.S. hysterectomy operations has been well documented.For years, it was Intuitive's primary growth driver domestically.When that growth hit the skids, many started to wonder if the slack could be picked up elsewhere.

During the first quarter, worldwide daVinciprocedure volume increased 13% -- with a 11% bump stateside and a 22% spike internationally. As international trends typically mimic trends in the United States, keeping an eye on successful and unsuccessful domestic procedures is important for shareholders.

For the fourth conference call in a row, management spent a lot of time talking about the success of the daVinci in improving outcomes in hernia operations, which should be a major growth driver for the company. President and CEO Gary Guthart said, "Growth was led by general surgery, particularly hernia repair and colon and rectal resections. Early response by surgeons to the use of da Vinci and early datasets in these procedures are very encouraging."

Buoyed by that trend, management inched the midpoint of its 2015 operation growth forecast up from 8.5% to 9.5%.

Margin contractionWhile a stronger dollar had a negative impact on the company's revenue, contracting margins concerned Wall Street the most.

The company reported that its newer instruments and accessories -- the blades in Intuitive's razor-and-blades model -- had higher manufacturing costs and lower margins than more mature instruments. Combine that with lower margins for the company's new Xi, and the company said investors should expect gross profit for 2015be 200 basis points lower than expected, at 66.4%.

The key here is figuring out whether these lower-margin products add more value to procedure growth than they take away from profit. If that's the case, investors will gladly take the trade-off.

In the end, it was a solid report. But at current pricing -- Intuitive now trades for 33 times non-generally accepted accounting principles earnings -- the stock is far from a screaming buy.

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Brian Stoffel owns shares of Intuitive Surgical. 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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