# Intuitive Surgical Inc. (NASDAQ:ISRG)

## Present Value of Free Cash Flow to Equity (FCFE)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

### Intrinsic Stock Value (Valuation Summary)

Intuitive Surgical Inc., free cash flow to equity (FCFE) forecast

US\$ in thousands, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 13.14%
01 FCFE0 1,735,900
1 FCFE1 1,989,895 = 1,735,900 × (1 + 14.63%) 1,758,726
2 FCFE2 2,262,404 = 1,989,895 × (1 + 13.69%) 1,767,284
3 FCFE3 2,551,028 = 2,262,404 × (1 + 12.76%) 1,761,244
4 FCFE4 2,852,564 = 2,551,028 × (1 + 11.82%) 1,740,635
5 FCFE5 3,163,007 = 2,852,564 × (1 + 10.88%) 1,705,848
5 Terminal value (TV5) 155,106,672 = 3,163,007 × (1 + 10.88%) ÷ (13.14%10.88%) 83,650,935
Intrinsic value of Intuitive Surgical Inc. common stock 92,384,672

Intrinsic value of Intuitive Surgical Inc. common stock (per share) \$258.70
Current share price \$238.37

Based on: 10-K (reporting date: 2021-12-31).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 3.27% Expected rate of return on market portfolio2 E(RM) 12.25% Systematic risk of Intuitive Surgical Inc. common stock βISRG 1.10 Required rate of return on Intuitive Surgical Inc. common stock3 rISRG 13.14%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rISRG = RF + βISRG [E(RM) – RF]
= 3.27% + 1.10 [12.25%3.27%]
= 13.14%

### FCFE Growth Rate (g)

#### FCFE growth rate (g) implied by PRAT model

Intuitive Surgical Inc., PRAT model

Average Dec 31, 2021 Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017
Selected Financial Data (US\$ in thousands)
Net income attributable to Intuitive Surgical, Inc. 1,704,600  1,060,600  1,379,300  1,127,900  660,000
Revenue 5,710,100  4,358,400  4,478,500  3,724,200  3,128,900
Total assets 13,555,000  11,168,900  9,733,200  7,846,700  5,758,000
Total Intuitive Surgical, Inc. stockholders’ equity 11,901,100  9,731,500  8,263,800  6,678,800  4,725,200
Financial Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00
Profit margin2 29.85% 24.33% 30.80% 30.29% 21.09%
Asset turnover3 0.42 0.39 0.46 0.47 0.54
Financial leverage4 1.14 1.15 1.18 1.17 1.22
Averages
Retention rate 1.00
Profit margin 27.27%
Asset turnover 0.46
Financial leverage 1.17

FCFE growth rate (g)5 14.63%

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

2021 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income attributable to Intuitive Surgical, Inc. ÷ Revenue
= 100 × 1,704,600 ÷ 5,710,100
= 29.85%

3 Asset turnover = Revenue ÷ Total assets
= 5,710,100 ÷ 13,555,000
= 0.42

4 Financial leverage = Total assets ÷ Total Intuitive Surgical, Inc. stockholders’ equity
= 13,555,000 ÷ 11,901,100
= 1.14

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 27.27% × 0.46 × 1.17
= 14.63%

#### FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (85,124,595 × 13.14%1,735,900) ÷ (85,124,595 + 1,735,900)
= 10.88%

where:
Equity market value0 = current market value of Intuitive Surgical Inc. common stock (US\$ in thousands)
FCFE0 = the last year Intuitive Surgical Inc. free cash flow to equity (US\$ in thousands)
r = required rate of return on Intuitive Surgical Inc. common stock

#### FCFE growth rate (g) forecast

Intuitive Surgical Inc., H-model

Year Value gt
1 g1 14.63%
2 g2 13.69%
3 g3 12.76%
4 g4 11.82%
5 and thereafter g5 10.88%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 14.63% + (10.88%14.63%) × (2 – 1) ÷ (5 – 1)
= 13.69%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 14.63% + (10.88%14.63%) × (3 – 1) ÷ (5 – 1)
= 12.76%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 14.63% + (10.88%14.63%) × (4 – 1) ÷ (5 – 1)
= 11.82%