Tuesday, February 24, 2009

Intuitive Surgical (NASDAQ:ISRG): Morgan Stanley and Oppenheimer out negative (ACTIONABLE SHORT ALERT)

Oppenheimer is out with a pretty negative call on Intuitive Surgical (NASDAQ:ISRG) noting that as the situation continues to worsen, their ISRG sensitivity analysis indicates a realistic scenario where 2009 EPS approach $4.00, which in all likelihood would pressure shares. Yet a "theoretical" value of ISRG without any unit sales contribution would be just over $70/share, so they suspect they'd see a solid floor for the stock in the mid-$80's.

If there are still pockets of denial about the deteriorating economic situation in relation to stocks, one prime example in healthcare seems to be the hospital spending crisis. While the issue by now is greatly discussed, some key underlying dynamics (investment income, unemployment, access to capital) keep getting worse, and the potential severity and longevity of the issue seem still to be underestimated by the Street and still not well reflected in shares.

Oppenheimer points to last week: 1) CYH's reduction of '09 cap-ex by another 15%, 2) Partners Healthcare's system (Boston area) cap-ex reduction due to new investment income losses, 3) Kaiser's just announced $2.3B investment loss in 2008, and 4) the broader difficulties of raising capital since the ratings agencies downgraded the nonprofit hospital sector from stable to negative about two months ago. Firm's checks indicate the March quarter is so far a continuation of the significant drought felt since early December, and they would avoid shares of ISRG, VAR and MR heading into those results.

As for ISRG, sensitivity analysis looks at the impact of da Vinci systems declines on mgmt's 2009 EPS guidance of $5.30-$5.40 (which assumes flat y/y unit growth). As they've detailed in the past, their current thinking is that units may decline by at least 20-30% or more, which would drive EPS toward the $4.00 area. Firm's new estimate of $4.85 (down from $5.05) is below the Street's $5.16, and remains at risk.

Notablecalls: With ISRG's sitting right at the $100 level and Oppenheimer calling for $20 worth of downside from here we may get a knee-jerk reaction. Looking for a 3-5 pts downside move off open. Calling it Actionable Short

PS: Note that Morgan Stanley is also out cautious on ISRG this AM saying consensus numbers do not fully reflect the severity of the capital-spending environment. Diligence indicates that capital spending will fall materially in 2009, putting management guidance of flat boxes at risk. Firm models system placements down 17% in 2009, which leads them to their Street-low estimates of $895 million in revenue and $4.68 in EPS, compared to consensus of $964 million and $5.16. Downward revisions appear likely through 2009, putting an overhang on the stock and underpinning firm's belief that it is still too early to own ISRG. This said, competitive position, earnings power, FCF yield and balance sheet quality will help the stock find a floor but not until visibility improves.

1 comment:

notablecalls said...

Looks like I got this one way wrong. I did notice how Aflac (NYSE:AFL) refused to come down on pretty neg. comments out of CSFB in the pre mkt.

That was the 1st warning signal but I decided to issue the ISRG call anyway as two firms were neg on it (smth that doesnt happen too often).