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Finding The Next Intuitive Surgical

Posted: Oct 01, 2007 12:12 PM by Matthew McCall

Tickers in this Article: IHI, ISRG, NUVA

A major theme that most investors will agree upon is the potential investment opportunities developing as baby boomers age - sometimes called boomernomics.

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The logical sector to begin with is healthcare. It is unfortunate, but one of the biggest expenses for an aging population is trips to the doctor's office for anything from eye problems to hip replacements. As the hospitals become more overcrowded each day, it is evidence of the demand for quick, high-quality health care. (For related reading, try Fighting The High Costs Of Healthcare.)

Add to the mix insurance companies trying to get you in and out of the hospital like it was a drive-through at Starbucks and it results in a demand for more noninvasive surgical procedures. Many surgeries that once landed a patient in the hospital for days are now outpatient procedures. This is due in large part to the advances in medical devices used in the surgeries. (To learn how boomernomics is affecting the retirement industry too, check out Boomers: Twisting The Retirement Mindset.)

The NUVA Wave
One of the hottest sectors in the entire market and in particular healthcare has been the medical devices stocks. Through September 21, the iShares Dow Jones US Medical Devices ETF (NYSE:IHI) is up 18% in 2007, versus a gain of 7.6% for the S&P 500 in the same timeframe. Breaking down the medical devices even further, we find Intuitive Surgical (Nasdaq:ISRG) is up 131% - a clear leader. Intuitive Surgical has been able to outperform the market and the sector primarily because of its efforts in noninvasive surgery and proprietary devices.

The next big stock to follow in Intuitive Surgical's footsteps could be NuVasive (Nasdaq:NUVA), which develops and markets equipment for the surgical treatment of spine disorders. The company's product portfolio is focused on applications for lumbar and cervical spine fusion, a market that was estimated to exceed $2.9 billion in the U.S. in 2005 according to the company.

The company's proprietary technology provides reduced surgery time, shorter hospital stays, and faster recovery times. All three benefit the doctor, patient, and insurance company alike. Over the last year, the company has added a handful of new products to their line of spinal devices. Along with the actual devices, NUVA also has intellectual property that consists of 48 issued U.S. patents and 197 patents pending.

Ready For a Profit
The most recent earnings report saw both total revenue and gross profit increase by over 50%, and an increase in the company's 2007 guidance. During the second quarter of 2007, sales increased by 59% from $22 million to $35 million from the year earlier. The company's CEO, Alexis Lukianov, attributes the strong numbers partly to the effectiveness of its exclusive sales force. This is a strategy that is new to the company, and so far it has paid dividends.

However, cash and equivalents fell from $143 million in the second quarter of 2006 to $88 million one year later. The company does expect to report a loss in 2007 of 36 cents per share, worse than the 9 cents in 2006. But, the outlook into 2008 is positive and analysts believe NUVA will turn its first profit, with earnings of 17 cents per share. Another positive factor NUVA has going for it is zero debt.

Should You Ride the NUVA Wave?
The stock is without a doubt a growth story. Revenues have grown 96% per-year when compounded annually over the last three years. The lone bearish argument is that NUVA has yet to turn a profit. However, this is a weak argument because it is rare for any medical device company in its early stages to be profitable on the bottom line. Now that NUVA has clearly cemented itself in a large number of hospitals, it is only a matter of time until the growing revenue turns into profits.

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By Matthew McCall

Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.

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