Medtronic or Intuitive Surgical: Which is the Better Buy After Earnings?

The future can’t arrive soon enough for these two medical device giants

I’ve been bullish on both Medtronic (NYSE:MDT) and Intuitive Surgical (NASDAQ:ISRG) at different points this year. However both stocks are under selling pressure even after each company delivered solid, if not spectacular earnings reports.

Medtronic just reported earnings on November 23. The medical device company beat on earnings but missed on revenue. This was, as the company described it, based on fears of hospital schedules and staffing continuing to be disrupted by the global pandemic.

I was briefly correct on a bullish call I made on MDT stock after its earnings report in August. However, the stock is down 16% from its 52-week high and is now in the red for the year.

In the case of Intuitive Surgical, the stock jumped nearly 10% immediately after it beat on both the top and bottom lines. However, since then ISRG stock has given up almost all of those gains.  Still, the stock is up 23% for the year which is roughly the same as the S&P 500.

Intuitive Surgical: A Pure Play on Robotic Surgery

The bullish case for Intuitive Surgical centers around the company’s DaVinci System, the first FDA-approved robotic-assisted, minimally invasive surgical system. The company says the DaVinci system has performed over 8.5 million procedures. And it has sold the system in 67 countries including in all of the 50 states.

The company’s other offering is Ion – a robotic-assisted endoscopy platform that can find small, hard-to-reach lung nodules that can help detect lung cancer.

Intuitive Surgical has over 4,000 patents which is protecting its intellectual property. And, at a price tag between $500,000 and $2.5 million, once a hospital or medical center installs the DaVinci system, it becomes cost prohibitive to replace it. This is reflected in the company’s net margin which is slightly over 30% as of this writing.

Medtronic: A Leader in Medical Devices

Medtronic is a leader in the sale of medical devices and technology. The company sells to hospitals, physicians, clinicians and directly to patients. Although the company had a difficult year in 2020 as many hospitals were shut down at the beginning of the pandemic, the company had a banner year in ventilator sales. And as those sales have trailed off this year, Medtronic has seen its other categories come back strongly. And the company has recently thrown in its hat in the robotic-assisted surgery sector with the launch of its Hugo system.

The bad news is that, for all of its promise, the field of robotic surgery is still a slow growing sector and will continue to add competitors. The good news is that, as long-term stocks, I believe the sector is large enough for both companies.

Which is the Better Buy?

The issue for me is about growth potential. And while both companies have long-term potential, I like Medtronic simply because it has more ways to generate revenue.

In terms of valuation, both stocks are a bit expensive with price-to-earnings (P/E) ratios above their respective sector averages. And this is after Intuitive Surgical’s 3-for-1 stock split earlier this year. However, with a P/E ratio of 39.64 Medtronic is trading at a lower price-to-earnings ratio relative to its sector average of 30.16 than Intuitive Surgical which has a P/E ratio of 72.50 compared to its sector average of 25.64. This is one reason I give the nod to Medtronic.

Another reason is that the company has more ways to generate revenue in what may be a tough environment. And when considering these stocks, it’s impossible to ignore Medtronic’s status as a Dividend Aristocrat. The company has increased its dividend in each of the last 44 years.