I look for "hot stocks" that are way overvalued on any objective basis
and then wait to buy them when the market over reacts in the other
direction. I think that ISRG is an example of such a company-- it's
been thrown out in the bathwater.
All of you who spend some time in the OR are probably familiar with
this company: they make the famous Da Vinci robot used for minimally
invasive surgeries such as prostatectomies, hysterectomies and some
cardiac indications.
Each unit costs the hospital $1.5 M and $120,000 p.a. to maintain the
device. There's one at Vancouver General Hospital. We have a single
surgeon on our staff who is trained to use the Da Vinci. He is
threatening to leave for greener pastures (down South) if the hospital
doesn't acquire one soon. (I hope he can speak American..... lol... I
wouldn't hold my breath waiting for it to come).
Target procedures:
Urology (over 150K target procedures in US)
da Vinci®Prostatectomy –dVP
dV Nephrectomy
dV Cystectomy
dV Pyeloplasty
Gynecology (over 350K target procedures in US)
da Vinci®Hysterectomy –dVH
dV Sacral Colpopexy
dV Myomectomy
Cardiothoracic (over 120K target procedures in US)
da Vinci®Mitral Valve Repair
dV Revascularization
General Surgery
The reason it is a GARP stock is that it is not remotely cheap in
absolute terms (sorry about the formatting):
Stock Industry S&P 500 Stock's 5Yr Average*
Price/Earnings 19.0 21.4 13.6 53.8
Price/Book 3.0 2.2 88.5 7.5
Price/Sales 4.4 2.0 19.4 13.2
Price/Cash Flow 13.9 12.7
8.1 20.3
Dividend Yield % --- --- 3.1 ---
* Price/Cash Flow uses 3-year average.
The thing is that even in this depressed economic environment, double
digit earnings growth is expected in this company for the next 5-8
years. The reasons for this are:
1. low market penetration so far
2. being designated "standard of care" for prostatectomies and
probably soon for hysterectomies. (as you all know these procedures
are demographically loaded! The expectation is that the number of
procedures will undergo almost logarithmic growth over the next 20
years).
3. high barriers to entry-- regulation, difficult to learn and
resistance to changing to new 'bots by surgeons
Other financial considerations:
1. no debt
2. very high and increasing free cash flows (215 M p.a. 2008)
3. "fat" net margins in the mid 30's
4. carrying $23/share of cash on the balance sheet to help it through
the recession/downturn.
Downsides to consider:
1. competition will eventually arise and squeeze margins
2. political risk-- Obama has his eye squarely on big Pharma and the
med device makers-- draconian legislation is not out of the question
3. pipeline? very expensive R&D
My approach will be do buy in the 80's and sell at $160 and above. I
don't intend to hold for the very long term (over 5 years) as I prefer
to invest in boring companies that are in slowly changing industries.
Surgical robots sure don't fit that criterion, eh?
and then wait to buy them when the market over reacts in the other
direction. I think that ISRG is an example of such a company-- it's
been thrown out in the bathwater.
All of you who spend some time in the OR are probably familiar with
this company: they make the famous Da Vinci robot used for minimally
invasive surgeries such as prostatectomies, hysterectomies and some
cardiac indications.
Each unit costs the hospital $1.5 M and $120,000 p.a. to maintain the
device. There's one at Vancouver General Hospital. We have a single
surgeon on our staff who is trained to use the Da Vinci. He is
threatening to leave for greener pastures (down South) if the hospital
doesn't acquire one soon. (I hope he can speak American..... lol... I
wouldn't hold my breath waiting for it to come).
Target procedures:
Urology (over 150K target procedures in US)
da Vinci®Prostatectomy –dVP
dV Nephrectomy
dV Cystectomy
dV Pyeloplasty
Gynecology (over 350K target procedures in US)
da Vinci®Hysterectomy –dVH
dV Sacral Colpopexy
dV Myomectomy
Cardiothoracic (over 120K target procedures in US)
da Vinci®Mitral Valve Repair
dV Revascularization
General Surgery
The reason it is a GARP stock is that it is not remotely cheap in
absolute terms (sorry about the formatting):
Stock Industry S&P 500 Stock's 5Yr Average*
Price/Earnings 19.0 21.4 13.6 53.8
Price/Book 3.0 2.2 88.5 7.5
Price/Sales 4.4 2.0 19.4 13.2
Price/Cash Flow 13.9 12.7
8.1 20.3
Dividend Yield % --- --- 3.1 ---
* Price/Cash Flow uses 3-year average.
The thing is that even in this depressed economic environment, double
digit earnings growth is expected in this company for the next 5-8
years. The reasons for this are:
1. low market penetration so far
2. being designated "standard of care" for prostatectomies and
probably soon for hysterectomies. (as you all know these procedures
are demographically loaded! The expectation is that the number of
procedures will undergo almost logarithmic growth over the next 20
years).
3. high barriers to entry-- regulation, difficult to learn and
resistance to changing to new 'bots by surgeons
Other financial considerations:
1. no debt
2. very high and increasing free cash flows (215 M p.a. 2008)
3. "fat" net margins in the mid 30's
4. carrying $23/share of cash on the balance sheet to help it through
the recession/downturn.
Downsides to consider:
1. competition will eventually arise and squeeze margins
2. political risk-- Obama has his eye squarely on big Pharma and the
med device makers-- draconian legislation is not out of the question
3. pipeline? very expensive R&D
My approach will be do buy in the 80's and sell at $160 and above. I
don't intend to hold for the very long term (over 5 years) as I prefer
to invest in boring companies that are in slowly changing industries.
Surgical robots sure don't fit that criterion, eh?
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