Intuitive Surgical ( ISRG - Analyst Report ) is slated to report its third quarter results on Tuesday, October 16, 2012. The current Zacks Consensus Estimate for the third quarter is $3.48, representing an estimated 14.1% annualized growth.

First Quarter Recap

Intuitive reported second-quarter 2012 earnings per share of $3.75, beating the Zacks Consensus Estimate of $3.53 and surpassing the year-ago quarter’s earnings of $2.91 per share.

Revenues increased 26% year over year to $536.5 million, beating the Zacks Consensus Estimate of $521 million.

On a segment basis, revenues from systems were $229.4 million, up 23% year over year. The growth was on account of sales of 150 systems, higher than the 129 systems in the year-ago quarter.

Instrument and accessory revenues were $223.7 million, up 30% year over year. Service revenues were $83.4 million, up 23% year over year. The growth was driven by a larger installed base of systems.

Estimate Revision Trend

Agreement

The overall trend in estimate revisions for the third quarter has been static (among 14 analysts) over the past 7 and 30 days.

A similar trend was witnessed for 2012 with no analyst (out of 14) changing his/her estimate over the past week and month.

The current Zacks Consensus Estimate for 2012 is $14.81, reflecting an estimated 20.2% year over year growth.

Magnitude

Given the lack of estimate revisions, the magnitude of revisions for the forthcoming quarter has hit a plateau over the last 7 and 30 days.

The magnitude of revisions for the forthcoming year has hit a plateau, over the past week and month.

Intuitive Surgical has generated positive surprises in each of the previous four quarters, and we expect the same trend may continue. The company produced an average positive earnings surprise of 10.0% over the preceding four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

Our Take

We expect a number of procedures that are currently completed either in an open surgical manner or with laparoscopy to be eventually replaced by da Vinci surgery, as robotic surgery becomes the standard of care in many instances. The company enjoys a virtual monopoly in robotic surgery with little competition.

Intuitive’s recurring revenue stream continues to grow and provides a shield against cyclicality of revenues arising from the sale of discretionary capital equipment to hospitals. However, we believe that until the global economy recovers fully, the stock may come under pressure as investors ponder whether lingering macro economic uncertainty will weaken hospitals’ commitment to buy high-cost robotic systems.

The pace of adoption of robotic surgery may therefore be lumpy and growth in usage requires acceptance from patients and training for medical practitioners. Intuitive competes with Accuray Incorporated ( ARAY - Analyst Report ) in certain niches.

We prefer to remain on the sidelines partly due to a high valuation, which factors in the attractive growth prospects of the company, despite the da Vinci system’s leading status as an enabler of robotic minimally invasive surgery. We are currently Neutral on the stock, supported by a short-term Zacks #3 Rank (Hold).