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Intuitive Surgical Is a High-Risk Stock Delivering Little Reward


NEW YORK (TheStreet) -- Shares of Intuitive Surgical (ISRG - Get Report) , a company that specializes in robot-assisted surgeries, have been on fire since the stock bottomed out at $376 on July 17. In a little over a month, investors have seen their wealth grow by roughly 27%.

The stock, at around $479, is up nearly 25% on the year to date, 3% less than the gains seen since July. This has raised questions as to whether these gains can hold. I don't see a scenario where that's possible -- at least not in the near term.

Trading at a price-to-earnings ratio of 35, these shares aren't cheap.

Intuitive enjoys a P/E that is 11 points higher than the industry average of 24, according to Yahoo! Finance. This makes no sense when investors can buy Covidien (COV) and St. Jude Medical (STJ) at much cheaper valuations. Both St. Jude and Covidien trade at P/Es that are 10 points less. Not to mention they both pay a respectable yield of more than 1.5%, compared to no dividend for Intuitive.

In the case of Intuitive, bulls insist they're paying for growth. With a P/E of 35 that's exactly what one should expect. But that's not what's happening. The company just posted a 12% year-over-year revenue decline.

This means investors are willing to pay eight times sales for a company that's also suffering from gross margin compression. That's a risky proposition. Gross margin just fell roughly three points year over year, missing Wall Street's estimates by almost one full point. With operating income declining 35% year over year, investors should ask, where's the value?

A company representative was not available for comment.

Although Intuitive's strong position in robotic surgeries has major growth opportunities, including areas like Japan and other markets, the company's current performance doesn't yet jibe with the stock price. I worry that investors are bidding up these shares before the market realizes its mistake.

Intuitive's da Vinci robot, which is regarded the best in the industry, is not alone anymore. Johnson & Johnson (JNJ) is now getting in the action and is working on its own surgical robot, ones that are smaller than da Vinci and more mobile.

I'm not suggesting Johnson & Johnson will immediately knock off Intuitive. But that doesn't matter. What I think is important to consider here is the extent to which Johnson & Johnson can enter the market and steal any share at all. It doesn't have to be the leader.

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