Speculative Trade - Intuitive Surgical (ISRG)
Today's speculative trade is related to Intuitive Surgical and the catalyst is its earnings report, which is scheduled for after the close today. Like with Websense earlier this week, we are confident the shares will be volatile after the news, and we have a long bias, so we will employ a strangle options strategy with more capital employed long versus short.
Last quarter, high flying Intuitive told the market that it could expect its expense structure to once again be heavy this quarter, and it did not provide a stellar report like in prior quarters. The shares subsequently fell sharply. This is a fast growing medical instruments company that makes the da Vinci Robotic Surgery System. It is gaining in usage because it is minimally invasive and requires less recovery time and less hospital stay, and has proven effective, something insurance companies like. It's gaining strong penetration in prostatectomy, hysterectomy and bariatric surgery. It's uses are in no way limited to those areas. It has a significant first-mover advantage in robotic surgery.
The company applies the Gillette razor/blade model, so to speak, with the system requiring parts and maintenance. We believe that due to last quarter's relatively weak result (only exceeding estimates by $0.04), the shares are poised to exceed expectations this time around. The shares trade at 46X the consensus EPS estimate for 2007 of $2.42. EPS growth is estimated at 42%, so the PEG is 1.1 based on those numbers. Long term growth is projected at a conservative 35%. Again, this is a case where past performance indicates that estimates are likely understated, so it appears to be an attractively valued high growth stock.
We invested approximately 80% of our capital long and 20% short, with the hope that if we are wrong, we can recover some capital. The options are priced for their extreme volatility, so a significant move is necessary to make money. However, ISRG seems to be capable of those kinds of moves around earnings time. We took interest in the Nov 120 Calls and Nov 90 Puts. Our strategic goal would make the Puts worthless, while returning significant gain from the Call options, if all goes to plan. Last quarter, the stock moved dramatically lower, ahead of the EPS report, so we are enthused to see the shares moving higher ahead of today's report. Volume picked up sharply after midday. Read into that as you like, but we view it positively. (disclosure)
Last quarter, high flying Intuitive told the market that it could expect its expense structure to once again be heavy this quarter, and it did not provide a stellar report like in prior quarters. The shares subsequently fell sharply. This is a fast growing medical instruments company that makes the da Vinci Robotic Surgery System. It is gaining in usage because it is minimally invasive and requires less recovery time and less hospital stay, and has proven effective, something insurance companies like. It's gaining strong penetration in prostatectomy, hysterectomy and bariatric surgery. It's uses are in no way limited to those areas. It has a significant first-mover advantage in robotic surgery.
The company applies the Gillette razor/blade model, so to speak, with the system requiring parts and maintenance. We believe that due to last quarter's relatively weak result (only exceeding estimates by $0.04), the shares are poised to exceed expectations this time around. The shares trade at 46X the consensus EPS estimate for 2007 of $2.42. EPS growth is estimated at 42%, so the PEG is 1.1 based on those numbers. Long term growth is projected at a conservative 35%. Again, this is a case where past performance indicates that estimates are likely understated, so it appears to be an attractively valued high growth stock.
We invested approximately 80% of our capital long and 20% short, with the hope that if we are wrong, we can recover some capital. The options are priced for their extreme volatility, so a significant move is necessary to make money. However, ISRG seems to be capable of those kinds of moves around earnings time. We took interest in the Nov 120 Calls and Nov 90 Puts. Our strategic goal would make the Puts worthless, while returning significant gain from the Call options, if all goes to plan. Last quarter, the stock moved dramatically lower, ahead of the EPS report, so we are enthused to see the shares moving higher ahead of today's report. Volume picked up sharply after midday. Read into that as you like, but we view it positively. (disclosure)
posted by The Greek | 3:11 PM
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