Saturday, October 27, 2007

Intuitive Surgical - a bargain?

I have spoken before about Intuitive Surgical (ISRG) - the robotic operation systems company that Wall Street is excited about. It has just reported Q3 revenue growth of 64% and an acceleration in system sales.

Robotic surgery is still in its infancy and ISRG is the leader. So is it good value?

Based on 2008 earnings of $6 per share and a share price of £330 the prospective PE is 55. That is very high but if ISRG can keep growing at a rate above 50% for the next 3 years then it will be worth it.

When the Q2 earnings came out the share price shot up to $200 which looked expensive. No one likes to buy into a company after a huge rise but those that did have made 60% in three months.

Of course ISRG is now expected to beat and raise every quarter and will be punished severely if it disappoints. However it has a monopoly in an new field with high barriers of entry and will probably be relatively untouched by a recession.

Google looked expensive at $300 a couple of years ago and those who bought in have now made 100%. EBay looked expensive at $120 three years ago and those who bought in are still 40% down (taking into account the stock split.)

So it could go either way. But for the patient investor the ISRG share price should be above $600 in 4 years time. That would be 20% annualised growth. Most investors would settle for that.

Saturday, October 20, 2007

eBay delivers again

Challenges come and challenges go but one thing seems to remain: eBay's bottom line keeps growing.

The latest struggles include a slowdown in new listings and underperformance by Skype. Despite this, revenue grew 30% and earnings increased by 53% thanks to a one-time tax benefit.

Here are the key take-aways from the Q3 earnings report and conference call:
  • Organic revenue growth was 23%
  • PayPal is still growing at a rate of over 30%
  • The performance of eBay America and Germany is still not where the executives would like it to be
  • Skype and advertising revenue are still growing at an almost 3 figure rate
  • Margins will come under pressure next year as eBay invest more in their products to keep the competition at bay.

So there is plenty for Meg and co to think about. But I expect the earnings growth to continue at a rate of at least 25%. So if eBay makes $1.80 next year and is awarded a multiple of 25 that gives it a price target of $45.

eBay is well diversifed as over half of its revenues are now from overseas. It would be likely to perform well in a recession as more users would turn to it to save money.

So it looks like eBay is still a buy below $40. I already have my full allocation - unfortunately all bought above $40 - so I will be cheering from the sidelines.

Wednesday, October 17, 2007

The meaning of risk

Is it just me or does Adam Applegarth, CEO of Northern Rock, have a different understanding of the word "risk" to the rest of us?

In defence of his bank's strategy he says that the current banking crisis could not be predicted.

But since when has the future been predictable? I thought risk management was about managing things that you cannot predict?

Why is his bank the only one that needed an emergency loan from the Bank Of England if his strategy was so benign?

I have nothing against the guy personally but the only thing that amazes me is that he hasn't resigned yet. As CEO you get the most pay and the most responsibility. So when your company nosedives you accept the blame and move on.

The once proud name of Northern Rock is now muck; the brand is irreparably damaged.

If I was from Newcastle and had seen my local bank driven into the ground I would certainly find Applegarth's position rather spineless. Take it like a man Adam and move on!

Tuesday, October 16, 2007

Now for the reward

I have spoken before about Genzyme's (GENZ) incredible risk - reward ratio. Well after 10 months in this stock I am finally seeing the reward.

Yesterday GENZ released results of the phase II trial of Campath. Campath is already approved as a cancer drug but GENZ is investigating its efficacy against multiple sclerosis.

The results were highly promising, suggesting that Campath is more effective than Rebif, the current standard MS drug.

The market for MS treatment is about $6 billion and the market liked the news - sending GENZ up over 4% on a day when almost everything fell.

So now I am up 18% on this stock. Woo Hoo! A fantastic performance made all the nicer because GENZ is one of my biggest holdings.

If GENZ hits $80 I will probably sell half my holding to lock in a 20% profit. But this is a stock I could be invested in on some level for a long time.

Saturday, October 06, 2007

Robbing Peter to pay Paul

Tesco released their first half results this week and the market liked them. Underlying earnings per share were up 17% and the dividend was upped 14%. The share price shot up over 5% as a result but I cannot make sense of the current valuation. The problem is that the business is not really growing at 17% but at 10%. The EPS growth includes profits from sales of their property portfolio which Tesco then leases back.

Tesco plan to sell a whole chunk of its property and use the profits to buy back shares and increase dividends. It sounds nice and certainly helped the share price but is it really such a win? What would happen if Tesco sold all its property and used the money to buy back shares? The share count would be less, the assets would be less and the profits would be less as Tesco would then have to pay rent for its stores. So everything would be smaller.

As a retailer you need property. Whether it is best to own it or rent it is up for debate. But I do not think releasing the value in your crown jewels is such an exciting move.

So back to the valuation. If Tesco is growing at 10% and has 100p per share in assets and is going to make 24p per share this year then the valuation could be

(24 * 10) + 100 = 340p

Maybe Tesco is worth more because of its defensive qualities and the fact that the rapid growth overseas may gradually result in overall growth accelaration as it become a bigger proportion of the pie.

So maybe Tesco is worth 400p. But it is currently at 460p so I will remain a share price observer for now.