Better Buy: Intuitive Surgical, Inc. vs. Johnson & Johnson

Healthcare is a funny business to invest in. If you prefer to focus on the pharmaceutical industry, there's very little middle ground: The drugs a company is making either get approved and become blockbusters, or they fall by the wayside, representing billions in sunk costs. Obviously, that tends to keep more-conservative investors away.

Image source: Getty Images.

But healthcare is much more than just flashy drug companies. Case in point: today's matchup of robotic surgical specialist Intuitive Surgical (ISRG -0.16%) and healthcare conglomerate Johnson & Johnson (JNJ 0.19%). While there's not a ton of overlap between the niches served by these two, they share one key trait: evidence of a moat that could keep them relevant healthcare players for decades.

But which is the better stock to buy today? There's no way to answer that question with 100% certainty. But if we approach the question from three different angles, you can start to understand the differences between the two stocks.

Financial fortitude

While cash that just sits in the bank might seem like a waste, it's an incredible asset once you zoom out a bit. Consider the reality that at some point during its lifetime, every company will encounter its fair share of chaos -- whether macro in nature or company-specific.

Groups that have cash in the bank are safe in such situations. In fact, they can outspend rivals, buy back shares on the cheap, pay a dividend, or even make acquisitions. Debt-heavy companies are on the other end of the spectrum -- forced to do everything possible just to make ends meet.

Here's how Intuitive Surgical and J&J stack up in terms of financial fortitude:

Data sources: Yahoo! Finance, SEC filings. Intuitive's free cash flow is an estimate based on information presented in the most recent earnings release.

When comparing the two, it's important to remember that Johnson & Johnson is valued at over 11 times the size of Intuitive Surgical!

Both of these companies have enviable balance sheets and healthy cash flows. If I had to make a choice, however, I'm going to go with Intuitive Surgical. The company's balance sheet is very strong with absolutely no long-term debt. And even though it will soon be parting ways with about $2 billion in cash through an accelerated share-repurchase program, it is in very good shape.

Johnson & Johnson isn't in trouble, per se, but the company also just made a splashy acquisition of Actelion for $30 billion in cash -- making the balance sheet much less healthy than it appeared when earnings were reported earlier this month.

Winner: Intuitive Surgical

Sustainable competitive advantages

If I could go back and start my investing career over again, I would devote 80% of my time to investigating the sustainable competitive advantages of the companies that I own. No other factor has played a bigger role in creating lasting value in my own portfolio.

Often referred to as a "moat," a company's sustainable competitive advantage is what separates it from the pack. It is what makes the company special and unique, and keeps customers coming back year after year. Both Intuitive Surgical and Johnson & Johnson have formidable moats.

Johnson & Johnson has three different divisions. The consumer division sells well-known products like Tylenol, Benadryl and Band-Aid that benefit from the power of their brand names. The pharmaceutical division gets its moat from patent protections -- though these are often short-lived and erode quickly once drugs come off patents. And the device division has a moat provided both by patent protection and installed base. Once a hospital invests in Johnson & Johnson's products, it is highly likely to utilize those instruments -- and order consumable parts -- for their full lifetime.

Intuitive Surgical, on the other hand, benefits from a strong installed base and very limited competition. Right now, the biggest threat to Intuitive Surgical isn't other companies but traditional surgical methods. With almost 4,000 da Vinci machines in use worldwide, and millions of hours of surgeon training on the company's machines, there's a huge data head-start -- in terms of what da Vinci can and can't do -- that other companies simply can't match.

At the end of the day, both moats -- while not ironclad -- are formidable, and I'm calling this a tie.

Winner: Tie

Valuation

Finally, we have valuation. While this isn't an exact science, there are some straightforward metrics we can consult to give us an idea of how expensive each stock is.

Data sources: Yahoo! Finance, E*Trade. P/E represents figures from non-GAAP earnings.

It's tough to argue against Johnson & Johnson winning this category. Intuitive Surgical's shares trade for a much higher ratio, based partially on the company's ability to increase procedures both domestically with hernia operations and abroad with urological procedures.

There's a little more breathing room for Johnson & Johnson investors, and the company will likely be less affected by any changes to the Affordable Care Act in the medium term, while Intuitive Surgical could be much more exposed to such changes.

Throw a healthy and sustainable dividend on top and Johnson & Johnson gets the nod here.

Winner: Johnson & Johnson

And the winner is...

So there you have it, we've got a draw. If I absolutely had to choose between the two, I'll go with where my skin is in the game: Johnson & Johnson isn't in my portfolio, but Intuitive Surgical accounts for over 3% of my real-life holdings.

I think the company's optionality makes it more attractive: As surgeons continue to tinker with Intuitive's platform, I believe they will eliminate the company from providing meaningful benefits in most procedures, but if they only find a few applications -- such as hernia operations -- that will make the company a force in the industry for years to come.