Tuesday, January 09, 2007

Calls of Note Part 4

- Wachovia is defending Intuitive Surgical (NASDAQ:ISRG) noting the shares are down year-to-date in 2007 after falling 18% during 2006 despite estimated 2006 EPS growth of 24%. The stock is presently trading at 39.5x firm's NTM EPS estimate. On a stock-based comp adjusted basis, this is an all time low NTM P/E and well below ISRG's two year average NTM P/E of 57x.

Firm believe that investors may be concerned about ISRG's 2007 guidance; initial 2006 guidance came in well below consensus estimates and the stock declined sharply as a result. However, heading into 2006 both ISRG's share price (at close to $140 vs. $91 currently) and consensus revenue estimates (at 37% vs. 33% currently) were considerably higher.

While the Cal Tech patent case does represent an overhang, the firm believes that any additional legal fees should have only a modest impact on annual EPS of $0.01-0.07 based on precedent patent litigation expenses at ISRG's peers (~$1-5MM/year). Since the suit has been brought by Cal Tech rather than a competitor the firm believes the worst case scenario for ISRG would involve royalty payments with little risk of an injunction. Resolution of the patent suit might take up to several years.

Valuation Range: $124 to $136. Maintains Outperform.

Notablecalls: Must say the chart looks tempting. Would not chase but rather be on the lookout for an intraday bounce. Could be worth several points.

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