2023-04-13 11:06:08 ET
Summary
- Earnings season is getting going, and options traders are not expecting much single-stock volatility.
- I see shares of ISRG as not far from fair value given its growth outlook.
- The medtech's chart remains strong after defending support last October.
The average stock is implying an earnings-day move of 4.4%, below its long-term average, according to research from Goldman Sachs. I am noticing generally low straddle pricing heading into Q1 earnings season.
Intuitive Surgical is one such name – with a volatile earnings reaction history, I see options as too cheap. Buying calls ahead of its Q1 report may be the right play. I reiterate my buy rating on the name.
A Earnings-Related Volatility Expected This Season
According to Bank of America Global Research, Intuitive Surgical ( ISRG ) is the soft tissue surgical robotics pioneer and market leader that first received FDA clearance more than 20 years ago. ISRG sells robotic systems and accompanying instruments that can be used in a broad range of surgical procedures. ISRG has a global installed base of close to 7,000 robots.
The California-based $92 billion market cap Health Care Equipment industry company within the Health Care sector trades at a high 71.7 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal.
Back in January, ISRG missed earnings estimates and shares sunk more than 10% immediately after the report despite a 7% YoY sales climb. Still, the company garnered bullish calls from Both William Blair and Morgan Stanley in research notes last month.
With bullish fundamental trends post-COVID, as demand for automation reigns supreme, the major risk with the company is its valuation. Also, a broader pullback in hospital investment amid an economic slowdown would hurt the Health Care name. But it is hard to see medtech spending losing too much steam over the longer term.
On valuation , analysts at BofA see earnings rising a solid 12% this year with an acceleration into 2024 and ‘25. The Bloomberg consensus forecast is even more upbeat. With no dividends, the firm’s operating and GAAP P/Es are stretched. But consider that the firm’s 5-year average forward non-GAAP earnings multiple is 55, compared to the current reading of 49. What’s more, the forward PEG is high at 3.5, but that is below the 5-year mean of 4.57, according to Seeking Alpha.
So, while trading at an EV/EBITDA ratio that is about 3x that of the S&P 500, the firm is free cash flow positive and sports some of the best earnings growth you will find without being too volatile on EPS. Overall, if we assign a 50x P/E on $5.50 of next-twelve-month EPS, then the stock is not far from fair value.
ISRG: Earnings, Valuation, Free Cash Flow Forecasts
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q1 2023 earnings date of Tuesday, April 18, after the closing bell with a conference call immediately after the numbers cross the wires. You can listen live here . The company also hosts its shareholder meeting on April 27.
Corporate Event Risk Calendar
The Options Angle
Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $1.20 which would be a 6.2% climb from $1.13 of per-share profits earned in the same period a year ago. While the company has topped estimates in 10 of the last 12 quarters, the stock price reactions have not been all that great. Shares have traded lower post-earnings in four of the last five events.
This time around, the options market is pricing in a small 4.7% earnings-related stock price swing after Tuesday’s Q1 release when analyzing the at-the-money straddle expiring soonest after the reporting date. Given some big moves lately after EPS reports, I would be a buyer of that cheap premium.
ISRG: Inexpensive Options Ahead of Earnings
The Technical Take
In October, I initiated a buy rating on ISRG, mainly based on technicals. The stock pulled back to key support from its trading range in 2018 through early 2020. Shares indeed bounced nicely, and a higher low was made in March after a surge to $285 around the turn of the year. I see near-term support at the March low of $223 while the recent peak is resistance.
There is more important resistance in the $309 to $321 area which is just under the all-time high. Overall, It appears a bottom is in now that the downtrend off the late 2021 zenith has been broken. I also like how the long-term 200-day moving average has turned positive. Overall, there continue to be positive technical features, and a long position above the $223 recent low makes sense.
ISRG: Shares Defend Support, Higher Low In Place
The Bottom Line
A closer look at ISRG’s valuation reveals that it is not that expensive. Meanwhile, the technical situation is doing all the right things from the bulls’ perspective. I reiterate my buy rating.
For further details see:
Intuitive Surgical: Trending Well Ahead Of Earnings, Cheap Options