Earnings season is well underway. And as always, some companies will report disappointing financial results and see their shares fall. Others have already had the opposite experience: strong earnings reports that sent their stocks higher.
There are two such companies DexCom (DXCM 2.02%) AND Intuitive surgery (ISRG 2.28%). These two medical device majors jumped after their latest quarterly updates, capping impressive recent form. But can they maintain that momentum?
DexCom focuses on helping diabetes patients with its innovative continuous glucose monitoring (CGM) systems, which allow them to effortlessly keep track of their blood glucose levels throughout the day. DexCom’s flagship device is the G6, from which it currently makes most of its revenue. And with increased use of CGM technology, the company’s financial results remain strong.
The company reported its third-quarter earnings on October 27. Revenue rose 18% year-over-year to $769.6 million, while adjusted net earnings per share (EPS) came in at $0.28, higher than the $0.22 reported in the year-ago period. DexCom’s results were well received by Wall Street, but there’s something else to be excited about.
DexCom licensed its next-generation device, the G7, in Europe earlier this year. The company has started rolling out this new CGM system in several countries there. CGM technology is already associated with better health outcomes for patients with diabetes.
But the G7 proved even better than the G6 in clinical trials. The first has yet to get the green light in the US, but DexCom expects that to happen before the end of the year.
With a brand new device under its belt, DexCom should continue to make strong progress in the vast diabetes space. The company estimates that even the American market remains very underpenetrated. Further, recent developments in the country can significantly increase the company’s opportunities in the country. The US Centers for Medicare and Medicaid Services (CMS) recently released a proposed new plan that would expand coverage for CGM devices.
Currently, only those on insulin therapy who take at least three doses a day are covered. The proposed plan would expand the pool of eligible patients to include, for example, those who have a history of hypoglycemia (low blood glucose levels), regardless of whether they are on insulin therapy. CMS has yet to finalize this decision, but based on historical data, there is an excellent chance that this proposal will find its way into the final plan. More people covered by third-party payers should help further increase CGM adoption.
In short, there is much more room to grow in the US market, and the same is true abroad. With an uncertain short-term economic outlook, this may or may not be the start of a new period of market returns. Still, DexCom stock is worth holding in these challenging times, especially for investors focused on the long game.
2. Intuitive surgery
Intuitive Surgical is a leader in robotically assisted surgery (RAS) thanks to its device, the da Vinci System. The company has had difficulties during the last two years due to the decrease in the volume of procedures, as a result of the pandemic. A comeback could be in the cards for Intuitive Surgical as the pandemic subsides. And despite the headwinds, it is recording good financial results.
In the third quarter, the company’s revenue rose 11% year over year to $1.56 billion. Intuitive Surgical’s adjusted EPS was flat year-over-year at $1.19, beating analysts’ estimates. The company’s proceedings also grew by 20% year-on-year during the period. Further, its installed base of da Vinci systems reached 7,364 at the end of the period, 13% higher than the year-ago quarter.
In other good news for investors, Intuitive Surgical recently announced that it would be repurchasing $1 billion worth of its own stock. Stock buybacks can signal management’s confidence in the company. In my opinion, this is justified, as Intuitive Surgical still has a lot of potential ahead of it despite its stock lagging the market over the past year.
Consider Intuitive Surgical’s installed base. As that number continues to grow, the company will make more and more money by selling instruments and accessories that accompany the da Vinci system and that doctors use in various procedures. In other words, a large installed base of Intuitive Surgical’s crown jewel creates a steady stream of revenue for the company.
Can healthcare facilities ditch the da Vinci system and buy a competing device? In theory, yes. But even here, Intuitive Surgical has some advantages. First, there aren’t that many healthcare companies that are direct competitors. This is why Intuitive Surgical held a nearly 80% share of the RAS market in 2020.
Second, switching is not simple. It takes hundreds of thousands of dollars to buy a new machine and invest the time needed to train medical personnel on the new equipment. These high switching costs ensure that Intuitive Surgical will retain most of its customers. Some estimates predict that the RAS market will expand at a compound annual rate of 19.3% through 2030.
It likely doesn’t stop there as minimally invasive procedures using RAS devices help patients achieve better outcomes and a faster recovery. With this massive opportunity ahead, investors should follow the lead of Intuitive Surgical’s buyback program and buy the company’s stock as well.