Buy on the dip -- Intuitive Surgical (ISRG)

This was too good an opportunity to pass up, in my opinion. I decided yesterday as I read the earnings releases and listened to the call that I would put in a lowball limit order just in case the market overreacted (in my opinion) to the somewhat conservative guidance and incoming tax issues.

Taxes were already known to be a new issue for ISRG in 2006 and 2007, and they also gave conservative guidance to begin 2005 (and we all know how that worked out, with the shares roughly tripling last year), so I considered both of those to be non-critical issues in light of the long term prospects for this business.

So I put in a limit order for Intuitive Surgical (isrg -- click to register for free RT streaming quote) at $112, just a few dollars higher than my last purchase at $109 in November. I was actually a little surprised that it dipped that low almost as the market opened and I received the shares, but I'm happy to have them. In the short term, it may well dip further below this point, but I expect to hold these for dramatic growth over many years.

I have written many times about Intuitive Surgical since I first bought shares -- most extensively when I looked at growth and the extent to which hospitals are advertising their robotic capabillities, and when I pondered the valuation and decided I thought it was reasonable.

Here's what I learned from the call :

They sold 40 systems in the fourth quarter, 9 of them overseas. 3 Da Vinci S systems have been placed in training centers. There are now 394 systems worldwide, and 31 hospitals now have multiple systems. They expect 1500 hospitals to be their market, and 3 machines per hospital to be a reasonable target. 150 robots overall were sold in 2005.

Growth continued to be dramatic -- revenue was up 60%, high-margin recurring revenue was up more than 70% (and is now 45% of revenue). They generally realize between $1,500 and $2,000 per procedure in instruments sales, so the growth (expected perhaps to be 70,000 operations this year, double last year) should continue apace in the recurring revenues space.

They have a great balance sheet -- $203 million cash, even after they bought a new building from HP (which tripled space for manufacturing and operations, I consider that to be very optimistic)

Several new studies were released this year indicating continued improvements in cancer control, continence and sexual function for robotic prostatectomies -- 20% of prostatectomies are already performed with the da Vinci, and I think patient demand should continue to drive that much higher (their goal is hitting 25% this year, which I think is conservative). The only argument against da Vinci prostatectomies is now the high up front cost. It's definitely worth listening to the call (archived on their website) just for the clinical update.

My opinion on the cost issue: In most cases hospitals can't charge more for the robotic procedures than for open procedures, but in the future this might change with the clear benefits to insurers of much shorter hospital stays and better results.

Mitral valve repair, gastric bypass, and "da vinci hysterectomy" can all be significant drivers of procedure growth if the good results we've so far seen continue. The huge gynecological market is just beginning to be tapped and may show growth that compares to prostatectomies in the coming years (but for a much larger market). It took about two years of study before the prostate surgery took off for ISRG, so the gynecological growth may be a year or two from hitting its stride.

Definitely worth listening to the conference call if only for the detailed review of the medical studies and literature -- the momentum in both increasing depth and breadth of procedures should continue without moderation given the consistently excellent results.

Then there were the guidance issues, which were what brougth the share price down to my buying level:

There is continued growth in demand. Total revenue growth of 25-30%. Instrument/accessory 45-55%, service 35-57%. Systems growth was lowballed at 15-25% given new system -- they're concerned that the ramp-up of the da Vinci S might delay some purchasing decisions as hospitals decide which machine to go with.

Gross margins should decrease near term due to low volume of Da Vinci S, then steadily increase by end of year to roughly current levels as the get volumes up.

Options expensing is going to be an issue for ISRG this year as well, again as expected. 2006 options expense should be between $21-28 million. Dilution could be as much as 10% or so depending on share price.

What everyone was talking about was the "tax event" that dramatically increased (almost doubled) 4Q earnings. Net taxes were negative in 2005, and guidance is impacted by the fact that they anticipate a 36-42% tax rate going forward that will impact reported earnings dramatically, but it is important to note that the majority of those taxes will not actually be paid in cash due to their remainign carryforwards that will get them through much of the year without any taxes due.

Robotic surgery continues to advance, and though it's always risky to be invested in a company with this kind of growth expectation I genuinely believe that they're underestimating the potential growth of robotic surgery ... and they remain the monopoly owner of the only meaningful and FDA approved surgical robot in the world. I would not be shocked if the price was cut dramatically at some point if their installations dip for a quarter or two, but I'm convinced that over the next five years this is going to be a spectacular investment.

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Rofin-Sinar's bumpy morning

Rofin-Sinar Technologies (RSTI -- click to register for free RT streaming quote) hasn't seen anything like today since back in November when Jim Cramer brought them to the attention of the Mad Money crowd and kicked off a more volatilie period for this laser manufacturer.

I wrote about RSTI back then following Cramer's attention, and not a lot has changed about the company in the intervening months ... except for the fact that they released market-beating earnings this morning and, in an 11am conference call, brougth the initial excitement back down to earth (up about 8% as earnings came out, moderated to about a 2% rise following the call).

I'm pretty pleased with how things are going for RSTI -- I still have them pegged as a relatively slow grower compared to many of my holdings, but I am very pleased about their ability to work through the problems in european and US manufacturing by relying more heavily for growth on their micro-lasers (used in chip manufacture, etc.) and their asian sales. For a relatively small company with a market cap well below $1 billion, they've got a very solidly diversified customer base around the world and a very broad offering of products for non-correlating industries (like semiconductors and auto manufacturing, which don't move in tandem). In the words of CEO Gunther Braun from today's release, "With positive developments in our Micro and Marking businesses, we were able to compensate for the softness in our Macro business." Having those three very different businesses under one roof gives us some significant protection from business cycles in any one industry.

So what do we hear from earnings? Well, the headline number this morning, and the one that got the market moving up so fast, was that they beat the 62 cent earnings estimate handily with a nice 73 cent quarter -- as we saw from Formfactor last night, beating earnings estimates is always good for the stock price.

They also had great margins last quarter -- 43% gross margins, higher than they've hit in years. Operating and net margins were also slightly better than recent quarters ... nothing to dance about, but encouraging. The Fool published a brief take on their margins history before earnings, and I see continued slow improvement -- just what the doctor ordered.

Their two main segments, micro and macro lasers, were near mirror images -- macro lasers, used for welding in manufacturing and heavily used in auto manufacturing, saw a sales decline of about 7% ... but micro lasers, used in semiconductors and similar applications, were up 18%. No surprises, and they are focused on improving sales of their macro welding lasers this year.

I haven't yet listened to the call, but I assume they tempered their forecasts for this year due to the softness in european and US auto manufacturing. Regardless, I think this is a fine company to hold for great diversification across some important industries, and I like the fact that their relatively small size makes it a little easier for them to go unnoticed while they grow (assuming Jim Cramer doesn't bring them up again).

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Back in good Formfactor (FORM)

Wow! Great results from Formfactor (FORM -- click to register for free RT streaming quote) today ... they beat the high analyst's estimate for earnings and blew away the average by 20% or so and the stock is climbing dramatically in the after hours session thanks to these great earnings and dramatically improved margins.

I wrote in my Annual Checkup that I thought FORM's margins and sales should really hit their inflection point and start dramatically improving in the first quarter of 2006, and I was very pleased with progress following their third quarter conference call a few months ago, but it looks like I was too pessimistic. The margins and sales are already up thanks to even just the partial use of their new facility and a great environment for their test equipment.

Now, of course, I regret not picking up some more FORM just before earnings today -- it looks like $30 was an awfully nice bargain price now that they're hitting their stride ... but as one who has been burned for several quarters by FORM's troubles with bringing their new fab online and correcting contamination problems at their older facility, I can't blame myself for a bit of caution.

Still, I am a big fan of this company's prospects -- now that they have industry-leading flexibility and dramatically increased capacity, as well as much-improved margins on their products coming out of the new facility, they should be able to do a much better job of leveraging their superior product to really boost sales and earnings.

To some extent, Formfactor is subject to the same cycle as the rest of the semiconductor companies have been, but their ability to help companies cut costs and increase production is important in both the expansion and the cost reduction swings in the cycle ... and I'm becoming convinced in part that the semi industry is not going to follow quite the same cycles as in the past -- chips are in so many more products now than just computers, and there are so many different markets for chips, that I expect the cycle to moderate somewhat ... that'll be good for those companies who, like Formfactor at times and like MEMC Electronic materials, are being discounted because all of us fear their eventual dramatic fall. I could certainly be wrong on that.

Can't wait to hear what they say on the call about their great margins and utilization rates in the new facility -- and if this stock market jubilations tempers a bit and the price dips from these ridiculous after hours highs (I saw $37 pass by a few minutes ago, which is more than a 20% boost after hours), I might be tempted to increase my position now that FORM seems to have proven themselves capable of taking the steps forward that we patient shareholders have been awaiting for the past year.

Congratulations, Formfactor.

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Google gives a surprise (GOOG)

After hearing so much about how Google's valuation was insane, about how they couldn't keep up this growth, about how the prick of a pin would burst the bubble, I'm a little shocked that it's only down about 10% today after falling short not only of average estimates but also, one would assume, of the expected "whisper numbers" that can be so important for a very volatile growth stock.

I think it's largely due to the fact that the business is doing fine -- from the call and from the earnings releases it's easy to get a sense that they are investing more than expected and paying higher taxes, but also seeing continuing high growth and continuing to take market share from competitors. For future growth, the controversial decision to cooperate with the Chinese government should also be a huge benefit -- Chinese searchers can still use the US-based servers if they want slow, interrupted searching, but they will now also be able to use a local server network for Google's fast, albeit censored, search. That puts them on the same footing as Baidu and the other locals as well as Yahoo and MSN in China, which I think is necessary if ethically unfortunate.

In the long run, meaning after a few more years in my estimation, I expect it to be fully impossible for China to censor the way they are doing today -- the innovation money and brainpower around the world is focused on sharing information, not on restricting it, and the gates will never be as powerful as the invaders. China's censorship will likely be as pointless in the long run as the great wall -- a powerful symbol, but not one whose construction can keep up with the competition.

I'll be interested to see how the GOOG share price reacts over the next few weeks, since I'm still considering selling a small portion, but I think the market has reacted in a surprisingly mature and measured fashion -- a bit of a dip makes sense given the growth expectations that were built into the shares, but I would have guessed this would crater more significantly on the surprising news ... thankfully, it appears the cratering was restricted to the after-hours cowboys.

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Annual Checkup -- NTO

Northern Orion (NTO -- click to register for free RT streaming quote) is a Canadian junior mining company that's getting less junior every day. I bought NTO back in May at $2.14, after having previously bought and sold it at a small profit in 2004. Seeing gold and copper prices -- really, all metal prices -- exploding lately has made me really regret selling AAUK when I did early in 2005, but at least I've got some very significant leverage to gold and copper prices with Northern Orion. None of my argument for buying NTO has changed since I picked up my shares, but the company has picked up another 100 million dollars (US) in market capitalization thanks primarily to the skyrocketing price of Gold. NTO is a risky company, since their holdings consist entirely of shares in three mines -- pieces of a mine in Cuba and the aging Alumbrera mine in Argentina, and 100% of the very promising but still a few years from production Agua Rica mine, fairly nearby Alumbrera. I haven't heard any new news since their last earnings report, but they ought to be reporting their 2005 numbers in the next couple weeks and hopefully we'll hear more then about finalizing the plans for financing and beginning construction at Agua Rica. I have seen my shares nearly double on the strength of very strong gold prices, which will mean that NTO gets better royalties from Alumbrera and will have more potential profit from Agua Rica, but they could easily retreat if gold does. I plan to hold this one as a speculative investment in a cash-rich company that has their hooks in a potentially spectacularly profitable copper (and gold) mine ... and the fact that it's a nice gold-related hedge for my portfolio is nice, too. The boom (bubble, maybe?) in gold makes me a little nervous, as does political risk in Argentina, but not enough to sell -- just enough to prevent me from buying more at these prices.

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Chico's buys more growth potential (CHS)

The market definitely likes today's news that Chico's (CHS -- click to register for free RT streaming quote) is acquiring the Fitigues company which, like Chico's, operates a chain of retail clothing stores selling self-branded stuff to a moderately upscale clientele.

Fitigues was started in Chicago and now is based in Scottsdale, AZ (already a Chico's hotbed). I had never heard of this company before, and have never seen their stuff, but from a glance at their website the fashion looks quite compatible with the Chico's idea -- they sell a lot of gussied up sweatpants and fatigues that are designed to be classy but comfortable, which is apparently a good upscale fashion trend to be riding right now. I had guessed that Chico's was more likely to try to take over Lucy, another small activewear store chain, than anything else when I did my annual checkup a while back, but this seems to be a plan along the same lines.

The market was quite enthusiastic about this acquisition, and even though we don't yet know the cost we can look at a few reasons for optimism.

First, the management team (company founders the Rosensteins) are coming over with the company, according to the press release. That's good news. And Steve Rosenstein things they've got a good thing coming -- he's quoted in the press release as saying that "The parallels and similarities of the early years of Fitigues and Chico's are quite amazing." That sounds pretty encouraging.

Second, they pick up a chain of stores that is just reaching the point where economies of scale can make a big difference -- Chico's should be able to help leverage manufacturing, distribution and back office operations to make the 14 stores in the chain (12 of which Chico's will own) much more efficient.

And third, Chico's has proven that they can take a small, unnoticed retail chain and take it to the moon -- just look at White House/Black Market, which is pounding out incredible growth numbers. If Chico's can help to create a well targeted experience and product line for Fitigues, they know how to expand the store presence quickly and profitably ... they've done it before.

Of course, without knowing how much they're paying for the company, it's hard to tell whether this deal is going to make short term sense. The only numbers I've seen are that back when Fitigues won an Inc. magazine prize in 1999 they were a $28 million company ... I have no idea what their chain is worth to Chico's today, though I assume it's not an enormous amount.

Most of all, given management's track record at building two great retail clothing chains targeting the same demographics as Fitigues, I'm inclined to give them the benefit of the doubt and assume, along with Wall Street today, that it's going to work well.

So we have one more way for Chico's to expand, and one more growth engine for a stock that has AVERAGED 90% annual gains over the past ten years. Can't wait to hear the details, which I assume will come at earnings or SSS announcement time.

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Annual Checkup -- NTES

There won't be a lot new to say about Netease (NTES -- click to register for free RT streaming quote) until they release earnings, which I expect will be sometime in the second or third week of February (that's just a guess, I haven't seen an announcement yet). NTES has been the more stable of my Chinese internet gaming investments, and the stock has performed much better this year than has Shanda. I wrote a bit about both companies back in November when they were on the ropes -- NTES because they didn't keep up the growth rate of the previous quarter, and SNDA because of their new "free games" revenue model and continuing poor results at the bottom of their game development cycle. I bought in to NTES right around $50 a share, so it has done fine for me to date (though it's much lower than during it's spectacular run earlier this year), and I'm still confident in the company's long term prospects -- not because I have great insight into the company, but because their market is potentially so massive that all of the companies should do well and they are very inexpensive relative to that growth potential right now. I find the China Stock Blog to be a great way to keep up on these "hard to follow" companies, especially analyst notes and conference call transcripts. With full positions in both NTES and SNDA I think I am probably already overexposed to this very volatile Chinese internet gaming sector, especially given all the political and regulatory risk on top of the strong competitive environment and execution risk, so I have no intention of adding to this one in the near future -- but I also see great potential for gains with these long-term speculative investments and do not plan to sell.

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Annual Checkup -- NHC

I don't believe I've ever actually mentioned my holdings in National Healthcare Corp. (NHC -- click to register for free RT streaming quote) on this site, though it has been in my portfolio for close to a year. This is a relatively small manager of health care facilities and services, mostly in the South, and I bought it because it was flying under the radar as a small cap AMEX stock (and was therefore cheaper than some of the big companies, like Sunrise) but is in an important business that I think should see continued dramatic growth. The company operates nursing homes and rehabilitation centers, as well as providing in-home care and similar services. They generally don't own the actual buildings, the real estate is held by a related company called National Health Investors (NHI) that trades as a REIT and is managed by more or less the same folks -- not unlike the strategies hotels have been following lately. NHC stock yields a small amount, and generally is not a fast mover -- some recent bumps on upgrades by minor analysts (the only ones who follow them) have brought notice, and they had a little trouble with the AMEX lately due to some registration mishaps that appear to have been totally insignificant. I am content to leave this company largely unwatched, and enjoy it's slow and steady advance as the population ages and the demand for their services skyrockets -- I expect they'll grow at a measured pace, and that the strong roster of insider owners will keep a good eye on their money for me. I purchased my shares last February at $34.20 and don't plan to buy or sell any of this one, though I may consider other investments in this sector if the bigger players ever reach good valuations.

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Annual Checkup -- MYGN

Myriad Genetics (MYGN -- click to register for free RT streaming quote) has been a solid performer for me this year but not a spectacular one. This is a speculative investment on MYGN's long term potential to develop a strong portfolio of drugs. There has been no recent news that compels much interest in MYGN among the investing pundits, so the stock has been relatively quiet this year, especially for a biotech company in the year of biotech enthusiasm. I haven't written about MYGN much recently, I posted my reasons for buying them when I added to the position back in September and when I first bought into MYGN on a newsletter recommendation back in July. Those two purchases give me an average cost of about $19.30 a share, so I'm sitting on a small gain that I have no intention of realizing anytime soon. MYGN's recent news has all been about Flurizan, their somewhat uninspiring Alzheimer's drug that's just now enrolling for a phase 3 study -- fortunately for MYGN, the market's expectations for Flurizan are quite low and, Alzheimer's being as difficult to treat as it is, the hurdles are quite low for approval. Flurizan has shown some potential to help patients with early stage Alzheimer's, and that might be enough to get approved and reach a respectable level of sales -- but any profit from this drug is gravy. What I'm interested in are the incredibly strong growth of their genetic tests, especially for hereditary cancers, and in their research programs to develop drugs for some of those same cancers -- they have several cancer drugs in phase 1 and 2 and any success there is many years off, but could be dramatic. Considering the portion of my portfolio that's already committed to MYGN, I am not inclined to add more -- I think it's fairly priced here, and at the moment I'm content to wait for results. Any selloff on bad Flurizan news could change my mind and give me a buying opportunity, but I don't expect that to happen.

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