Abbott Or This Robotic Products Company?

We believe that Intuitive Surgical stock (NASDAQ
NDAQ
: ISRG) is a better pick than its sector peer, Abbott stock (NYSE: ABT). Although ISRG stock trades at a higher valuation of 16.5x trailing revenues, compared to just 4.6x for Abbott, this gap in valuation makes sense, in our view, given Intuitive Surgical’s
ISRG
superior revenue growth, profitability, and financial position, as discussed below.

Looking at stock returns, ISRG has outperformed ABT and the broader indices. While ISRG is up 14% this year, ABT is up 0.4%, and the S&P500 index is up 8%. There is more to the comparison, and in the sections below, we discuss why we believe ISRG stock will offer higher returns than ABT stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Abbott vs. Intuitive Surgical: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Intuitive Surgical’s Revenue Growth Is Better

• Intuitive Surgical’s revenue growth has been slightly better, with a 12.4% average annual growth rate in the last three years, compared to 11.45 for Abbott.
• A high demand for Covid-19 testing drove Abbott’s sales growth in recent years.
• For Intuitive Surgical, revenue growth over the recent years has been driven by a rebound in procedure volume, which was adversely impacted in the initial phases of the pandemic due to the shelter-in-place restrictions.
• Even if we look at the last twelve month period, Intuitive Surgical fares better with sales growth of 8.9% vs. -6.8% for Abbott.
• With the worst of Covid-19 behind us, the demand for testing has been declining, weighing on Abbott’s diagnostics business in recent quarters.
• On the other hand, Intuitive Surgical continues to expand its installed base, which results in the growth of recurring revenues for its consumables, bolstering its sales growth.
• Our Abbott Revenue Comparison and Intuitive Surgical Revenue Comparison dashboards provide more insight into the companies’ sales.
• Looking forward, Intuitive Surgical’s revenue is expected to grow much faster than Abbott’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 3% for Abbott, compared to a 14% CAGR for Intuitive Surgical, based on Trefis Machine Learning analysis.
• Abbott will see a dip in sales in 2023 owing to its diagnostics business. For perspective, Abbott expects total Covid-19-related sales of $2.0 billion in 2023, compared to $8.4 billion last year. However, it should return to growth next year, and its other businesses, including Medical Devices and Established Pharmaceuticals, should continue to grow steadily. Intuitive Surgical will likely see the expansion of its installed base with more system placements.
• Note that we have different methodologies for companies negatively impacted by Covid and those not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

2. Intuitive Surgical Is More Profitable

• Abbott’s operating margin has risen from 16.1% in 2019 to 20.4% in 2022, while Intuitive Surgical’s s operating margin declined from 30.7% to 25.2% over this period.
• Looking at the last twelve month period, Intuitive Surgical’s operating margin of 24.2% fares better than 18.2% for Abbott.
• The decline in operating margin for Intuitive Surgical can be attributed to its increased investments in R&D, which grew 1.5x faster than the company’s sales growth. The situation was the inverse for Abbott, with its sales rising 2x faster than its R&D and SG&A expenses.
• Our Abbott Operating Income Comparison and Intuitive Surgical Operating Income Comparison dashboards have more details.
• Intuitive Surgical’s free cash flow margin of 25.5% is higher than 20.9% for Abbott.
• Looking at financial risk, Intuitive Surgical fares better with its 0.4% debt as a percentage of equity lower than 8.8% for Abbott, and its 50.4% cash as a percentage of assets higher than 12.9% for the latter, implying that Intuitive Surgical has a better debt position and more cash cushion.

3. The Net of It All

• We see that Intuitive Surgical has demonstrated better revenue growth, is more profitable, and has a better debt position and cash cushion. This also explains its higher P/S multiple compared to Abbott.
• Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Intuitive Surgical is still the better choice of the two, despite its higher valuation.
• If we compare the current valuation multiples to the historical averages, Intuitive Surgical fares better, with its stock currently trading at 16.5x trailing revenues vs. the last five-year average of 20.6x. In contrast, Abbott’s stock trades at 4.6x trailing revenues vs. the last five-year average of 5.4x.
• Our Abbott Valuation Ratios Comparison and Intuitive Surgical Valuation Ratios Comparison have more details.
• The table below summarizes our revenue and return expectations for Abbott and Intuitive Surgical over the next three years and points to an expected return of 7% for Abbott over this period vs. a 43% expected return for Intuitive Surgical, based on Trefis Machine Learning analysis – Abbott vs. Intuitive Surgical – which also provides more details on how we arrive at these numbers.

While ISRG may outperform ABT over the next three years, it is helpful to see how Abbott’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Xylem vs. Merck.

With higher inflation and the Fed raising interest rates, among other factors, ABT stock has risen just 0.4% this year. Can it drop from here? See how low Abbott stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

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