Value Investing Forum

Hi,

This company looks interesting. Great balance sheet. No long term debt and they have plenty of cash to cover current liabilities. Fantastic FCF growth, and the future does look promising. Wide moat; no real competitors and a very high barrier to entry, as there are no technologies that exist today which compete with da Vinci systems. A future competitor would have to spend quite a bit of R&D in order to build a competitive product. But I don't think it's a great value at this price point. Assuming a discount rate of 12%,  ISRG would need to sustain a 25.7% growth rate in order to maintain its current price of $280.99 per share. That appears, at least to me, to be very aggressive growth. Also P/FCF ratio of 25.1, P/E of 32.3 seem awfully high, much higher than I would normally purchase at. Using a 21% growth rate, and a discount rate of 10%, I get an intrinsic value of $262.91. This looks like a great company; but at this price point, it just doesn't seem like good value. I'll keep an eye on this company though; if the price drops below $200 a share, I think I would consider buying.

Hi Daniel,

Well I gave this a cursory look and so far I like what I see. First, this business has proven to be quite recession proof given that FY2009 unit sales volume maintained the unit volume seen in FY2008 (actually increasing by ~1%). Though note that most of the orders for FY2009 came in in the second half once credit conditions eased; first half of 2009 had a decline in sales volume (142 vs 159 in the first half, change of -11%).

What I like even more about the sales mix of the company is that ~50% of the revenue is recurring from systems services and sale of operation accessories (such as the EndoWrist and surgical tool tips). These are only reusable for a number of procedures then must be replaced, so as the base number of machines increase your recurring revenue moves up as well.

You mentioned that the international market has not had penetration, and this is true. Looking at the economic backdrop, however I'm not sure how long it will take for them to move into Europe. Though I'm no economist I'm pretty sure the government austerity measures they're placing over there are going to significantly impact spending on expensive hospital equipment. So although you cite the fact that there has not been much growth in the international markets, there have been good reasons for that – taking into account that the U.S. has a high concentration of wealth, and thus a higher demand for top-end medical procedures. Not to mention that unlike Europe, the U.S. has not clamped down on social services (no cuts to Medicare, none to Social Security).

Of course, the use of a 20-year DCF model tells me you're looking way past the current macroeconomic condition and well beyond. I think you should try to lower the growth rates for the first 10 years of your projection to match the current market price and see what kind of rates you get. If you think those valuations are fair (or undervalue the growth) then you got yourself a good deal. 

I can't really comment on whether I myself consider this a good investment because I only just looked over this business for 30 mins. It's also not really my style of investing (value w/ catalysts). I do think the company is quite excellent and the business model looks to grow quite well into the future. Should the markets offer me a better discount on the stock I will certainly look again. Do let me know if you find some of my reasoning to be faulty – I would greatly appreciate the opportunity to learn.

I'm not too familiar with performing DCF valuations. Is it usual to give a 20 year forecast of FCF and discount it back to present value? I guess in this case the terminal value you're using is the current equity, which I think is reasonable. 

How did you come up with the growth rates up to 2020? I'm just interested in the rates above 5% – I'm guessing the estimated growth rate for the next 5 years is an analyst concensus?