Morningstar | Intuitive's Procedure Growth Is Impressive, but Beware of Rich Valuation. See Updated Analyst Note from 20 Jul 2018
Intuitive's procedure growth continues to defy our expectations. While we aren't surprised by the strong uptake of robotic-assisted surgery in general surgery, mature procedures remain at elevated levels. Midway through the year, Intuitive's procedure growth sits at 17%, well above our forecast and the company's own guidance. We're raising our forecast for procedures to 16% for the full year, which leads to a boost in our fair value estimate to $275 per share from $257 . We are maintaining our wide economic moat rating.Second-quarter procedure growth was driven by 17% growth in the U.S. and 22% outside the U.S. Considering the total volume for da Vinci in the U.S., 17% growth is nothing short of remarkable. The uptake in general surgery isn't too surprising, as hernia and colorectal adoption rates are largely in line with our forecast. It is the unexpected strength in mature procedures that is buoying U.S. volume from the approximate 10% year on year we'd expect; both dVh and dVp remain elevated, and the company itself doesn't see those trends as sustainable.
Instrument and accessory revenue grew 20% on last year. Systems revenue increased 28% versus second-quarter 2017. We note that a substantial percentage (37%) of the total unit sales volume was attributable to trade-ins. This is the third quarter in a row where trade-ins were more than a third of total unit placements, which is a bit surprising, considering the Xi family has been around for several years. We anticipate this level to moderate, and system sales should pull back in 2019, as comparisons will be particularly challenging.
The firm's margins and earnings growth were in line with our expectations. We anticipate some margin pressure in the latter part of the year with the new Sp model rollout. The company is now trading at 15 times its 2018 sales and nearly 50 times earnings, well above its historical highs. We remain bearish on the company's shares.
Intuitive Surgical develops, manufactures, and markets the da Vinci? Surgical System and the Ion? endoluminal system. The systems consist of a surgeon console or consoles, a patient-side cart, a vision system, and proprietary instruments and accessories. The company's technology is designed to provide surgeons with a range of motion analogous to the motions of a human wrist, while filtering out the tremors inherent in a surgeon's hands. The company's primary platform for robotic-assisted surgery is its family of da Vinci Surgical Systems. The da Vinci Surgical System allows surgeons to operate while seated at an ergonomic console viewing a three-dimensional image of the surgical field.
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