With Increasing Conviction In Intuitive Surgical, Analyst Sees 17% Upside From Here

Leerink raised its price target for Intuitive Surgical, Inc. ISRG, following a thorough model review, which increased the firm's conviction on the company. The revised price target represents a 17-percent upside from current levels.

An Aggressive View

Analysts Richard Newitter and Ravi Misra said they are taking a more aggressive view on incremental revenue/earnings per share potential into the out-years for two upcoming product cycles in 2018 and 2019. The analysts are of the view these products are underappreciated and have the potential to be outperform their expectations.

Leerink is also positive about the company's potential in its underpenetrated international segments, including Japan. The firm sees the reimbursement for new procedures in Japan to be an acceleration driver in the region.

Opportunities Not Adequately Factored In

Meanwhile, the firm lists the following as areas it has not incorporated in its model but present opportunities for upside to its 2017–2020 forecast:

• Capitals sales contribution from mainland China tenders.
• Incremental procedure penetration from the Sp launch.

The firm is of the view that the Sp launch has the potential to expand the company's total addressable market by 426,000 procedures annually. The firm also said its new out-year estimates have given more credit to the company's $1 billion+ free cash flow generation per year.

Raising Estimates

Accordingly, Leerink raised its 2018–2018 revenue and earnings per share estimates above consensus expectations. The firm clarified that the 2017 estimates reflect revenue from an earlier-than-anticipated FDA approval of X, by May 30, and the commensurate realization of both deferred revenue from X and the earlier-than anticipated commercialization.

"Our 2018 onward estimate changes reflect increases in several revenue components in our model, but the most meaningful ones in 2018 relate to higher contribution from X (newly launched system for more price sensitive customers with "Xi light" functionality and lower ASP) and Sp (nexgen single port MIS platform)," the firm added.

Premium Valuation Justified

As such, Leerink reiterated its Outperform rating on the shares of Intuitive Surgical and lifted its price target to $1,080 from $850, a premium valuation to the peer group. The firm said it is now increasingly convinced in the company's ability to sustain mid-teens top- and bottom-line sales growth and to deliver upside to consensus estimates.

The firm is also optimistic about the company's multiple new product cycles that should help drive increased penetration into a still large and underpenetrated long-term robotic surgery opportunity.