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ISRG's Buyback Plan After Weak Q2

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Intuitive Surgical (ISRG - Free Report) has approved yet another share repurchase program. The board of directors has authorized a buyback of $779 million in addition to the existing $721 million pending from earlier programs. This brings the total value of the buyback program to $1.5 billion. The approval is an effort by the company to boost investor confidence following disappointing second-quarter results.

As a part of this authorization, this robotic surgery device maker forged an accelerated share repurchase program with The Goldman Sachs Group (GS - Free Report) . As per the terms of the deal, ISRG will buyback $500 million of its common stock from Goldman, most of which will be repurchased within 2 weeks and the rest by Oct 29, 2013.

Management plans to fund the program through cash and investments. The company exited the last reported quarter with cash, cash equivalents and investments of about $3 billion (up 15.1% year over year).

The share repurchase program will likely boost Intuitive’s earnings. However, we believe serious fundamental issues along with a weak near-term outlook will remain concerns for ISRG.

Intuitive reported disappointing second-quarter results with earnings of $3.90 missing the Zacks Consensus Estimate by 3.70%. The Zacks Consensus Estimate for 2013 declined 12% to $15.78 over the last 30 days.

Revenues, too, substantially lagged the mark by $17 million. Lower sales of the flagship da Vinci product is the prime matter of concern. Sales of the da Vinci product in the second quarter decreased to 90 in the U.S. from 124 in the year-ago period.

The weak performance compelled the company to lower its guidance for 2013. Due to soft capital sales of the da Vinci system, the company lowered its revenue expectation to flat to 7% for 2013. Previously, ISRG had provided its sales growth guidance in the range of 16% to 19% for the year.

We believe that the company’s products will experience severe headwinds due to the stiff capital spending environment and sluggish benign gynecologic procedures in the U.S. Moreover, a warning letter from the U.S. Food and Drug Administration (FDA) adds to the woes.

The stock carries a Zacks Rank #5 (Strong Sell). While we strongly recommend avoiding this stock, medical stocks such as Globus Medical (GMED - Free Report) and IDEXX Laboratories (IDXX - Free Report) are worth considering. Both these stocks carry a Zacks Rank #2 (Buy).

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