Why Key Analyst Sees 25% Upside in Intuitive Surgical

Canaccord Genuity reiterated a Buy rating with a $615 price target, implying upside of 25% from current prices. This is based on recent market volatility and the associated pullback in stock price, coupled with the firm’s conversations with management about the growth opportunities that lie ahead.

The firm sees improving business conditions and market dynamics, discussed in more detail in the paragraphs below, which it believes will drive earnings and cash flow growth, as well as multiple expansion in the stock over the near to medium term.

In its report, Canaccord Genuity gave its investment thesis as:

Our July 2015 upgrade was predicated on fundamental improvements in ISRG’s business, including shifting trends in the overall MIS procedural landscape portending solid procedure growth over the medium term, stabilizing gross margins and an improving global capital equipment market, not to mention new product launches on the horizon (e.g. SP system, new procedure approvals in Japan). We think ISRG is well positioned to experience sustained double-digit procedure growth over the next 12-18 months. Longer term, we believe robotic surgery will continue to capture share of the expanding MIS procedure “pie,” driven by an ongoing mix shift within the physician community from open to MIS surgery. We specifically see this playing out in the general surgery field, where we model a cumulative annual procedure market potential that is materially larger than the combined prostatectomy and gynecology markets, which served as ISRG’s growth engines over the past decade. We recommend large-cap growth investors add to positions in ISRG at current levels, reiterating our BUY rating and $615 price target, which portends >20% forward 12-month return.

The firm saw strong, improving procedure growth trends in the second quarter (8% sequentially, 14% year over year) that were driven in large part by continued uptake of robotic surgery in general surgery. Second-quarter results drove management to upwardly revise its 2015 procedure volume growth guidance to 11% to 13% from the prior range of 8% to 11%.

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So far in 2015, Intuitive Surgical has underperformed the market, with shares down 6.6% year to date. However, in the past 52 weeks shares are up over 8%.

Shares of Intuitive Surgical were down 0.5% at $492.00 on Wednesday. The stock has a consensus analyst price target of $593.71 and a 52-week trading range of $449.34 to $564.86.