ResMed (ASX:RMD): Investors who bought the dip would be satisfied, but is there any growth left in this one?

Nick Sundich Nick Sundich, May 16, 2024

ResMed (ASX:RMD) is one of the few ASX healthcare stocks that has successfully made it in the USA. In this article, we look at the company and ask whether the weakness in the share price is a chance to ‘buy the dip’ or do you run the risk of catching a falling knife?


Who is ResMed?

ResMed is a company that sells cloud-based medical devices to people suffering from sleep apnea, Chronic Obstructive Pulmonary Disease (COPD) and other respiratory disorders. It was founded in Sydney in 1989 and has since redomiciled to San Diego and is listed on Wall Street as well as the ASX – each ResMed share on the NYSE represents 10 on the ASX. It services 140+ countries, employs >10,000 people and makes US$4bn in revenue per quarter.

The company benefits more than it otherwise would because it offers in-home solutions and sleep apnea can take a while to diagnose, meaning customers come through the door slowly but steadily. It claims to have helped 160 million people during FY23 and wants to help 250m lives by 2025.


A COVID boom, followed by a hangover?

In the five years prior to COVID, it generated average annual earnings growth of 9%. The pandemic was a boom time for it because of the need for ventilators. And even during FY23, it grew revenues by 18% – 21% during the June quarter.

Shares are up have nearly doubled in the last 5 years. And they would be up by even more had it not been for a 20% retreat in September quarter of 2023. The catalyst was the company’s quarterly and annual results. Unfortunately, gross margins contracted 80 basis points to 55.8%. This was due to higher component and manufacturing costs, partially (but not completely) offset by an increase in selling prices.


The Ozempic effect

We also think part of the decline can be attributed to the sell off in health stocks around that time due to the fear of what weight loss drugs like Ozempic, Wegovy and the like could do to stocks such as ResMed. Because if you reduce obesity, you could reduce the need for treatments such as sleep apnoea machines saw the market overly fearful around the impact it will have on RMD’s addressable market.

Since then, shares have recovered back to levels they were nearly a year ago. What has been the story.


ResMed (ASX:RMD) share price chart, log scale (Source: TradingView)


Ozempic’s impact has been over estimated

Let’s address the impact of weight loss drugs first. Estimates show that roughly 70% of ResMed’s customers do have obesity related sleep apnoea. RMD’s own analysis on the drugs estimate that it will reduce their total addressable market (TAM) by $200m to $1.2bn from $1.4bn.

However, a few things things ought to be noted. First, even if you reduce obesity and stop conditions requiring ResMed’s machines as a treatment, this doesn’t wipe out those who already have these conditions. Second, there is evidence these drugs need to be taken consistently to have an impact. Third, even people who like the drugs don’t tend to take them long-term. Only 30% of users still on the drug a year after starting. Fourth, you could even argue that Ozempic may make people more aware of their health and seek airway pressure therapy as another way to improve their health. CEO Mark Farrell recently made this argument, claiming patients prescribed a GLP-1 drug like Ozempic are more likely to seek airway pressure therapy.


The fear of margin impacts was greatly exaggerated

Let’s turn to the issue of the company’s margins and look at its results since August 2023. Despite being in the US, it follows a July to June financial year, although it releases results each quarter as it is required to under US law. The ASX only needs non-cash flow positive companies to report quarterly, and even then, they need only submit a cash flow statement.

ResMed’s results for the September quarter of 2023 were US$1.1bn in revenue (up 15%) and a net income (or profit) of $219.4m, up 4% from the year before. Granted, the company’s gross margin was down by 3% but was 56%. In the December quarter, the company made US$1.2bn in revenue (up 11%) and its profit was $208.8m, down 7%. Nonetheless, its ‘non-GAAP net income’ (think adjusted profit) was $277.3m, up 13%. Its statutory Gross margin (what the company must report under accounting standards) contracted to 55.6%, but adjusted gross-margin was up 10 basis points to 56.9%.


A strong March quarter

In the March quarter of 2024, it made $1.2bn in revenue (up 7% from 12 months ago), its profit was up 29% to $300.5m and its gross margin was up 260 basis points to 57.9%

ResMed has credited its performance to strong sales growth from existing and new products not to mention reduced costs overall. Although component costs are increasing, freight costs are reducing and forex movements are more favourable. Amongst its products are its AirCurve and AirFit F40 devices. The latter of these has a silicone cushion designed to maintain a facial seal, even when moving around during sleep. The company’s goal is to ‘improve 250m lives in 2025’.


Growth still expected in the years to come, but is the company worth the price

There are 12 analysts covering the company in the US and another 12 on the ASX. The average target price amongst Australian analysts is A$34.43 (a 6% premium to the current share price), whilst the average target price amongst US analysts is $216.65 (roughly in line with the current US share price). We have done our own DCF modelling of ResMed and we think it is is worth US$200.87 per ordinary share, roughly 12% from the current share price on the NYSE. We used consensus estimates and an 8.7% WACC.


Solid growth ahead

In FY24 (the 12 months to June 30 2024), analysts expect US$4.7bn an overall 11% increase from the year before, and a ~$1.02bn profit, a 13% increase from the year before. In FY25, $5.0bn in revenue (up 8%), and a $1.2bn profit (up 18%), followed by $5.4bn in revenue (up 7%) and a $1.33bn profit. The stock is trading at a P/E of 25.3x for FY25 and a PEG of 2.2x which may suggest it is overvalued at first glance. Nonetheless, investors should keep in mind that this is an American company and they tend to trade at higher multiples than companies exclusively listed on the ASX do.

We think there is a significant long-term growth opportunity in ResMed as long as is able to maintain control over its margins. There are few other companies having an impact on so many people than this one. There may be short-term volatility, but investors who buy and hold for a few years should not be disappointed.


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