ResMed wires growth upside to ‘cloud-connected’ devices
Due to some impressive quarterly results, and the robust outlook for future earnings growth, leading global developer and manufacturer of medical devices ResMed Inc (ASX: RMD) is emerging as one of the year’s true standout stocks, having posted an 8% share price increase so far this year – while the S&P/ASX 200 is in negative territory by a similar amount.
Displaying all the characteristics of a stock with sustainable competitive advantage, ResMed – which sells its products in around 100 countries – has a truly investment grade balance sheet, and has consistently delivered shareholders with outstanding results.
ResMed’s long-term funding surplus of $1.24 billion means the company is well positioned to pay out dividends, while giving it the capacity to fund future research and development; plus ongoing acquisitions.
ResMed has generated an average 15.35% return on equity (ROE) since 2006. The stock recently generated ROE of 22.23%, and this is expected to grow to 24.64% by 2018.
In other words, for every $1 of shareholder capital invested, ResMed now generates around 22 cents worth of profit annually, this compares to around 14 cents in 2010.
Earnings per share (EPS) has increased by 16.92% annually; and EPS of $2.51 in 2015 is forecast to increase to $2.68 in 2016, $3.01 in 2017 and to $3.37 a year later.
Much of the recent vote of confidence in the stock can be attributed to some spectacular results, plus strong growth outlook around its cloud-connected devices.
During the quarter ended December 31 2015, revenue was $454.5 million – up 7% the quarter ended December 31, 2014 – a 13% increase on a constant currency basis, while gross margin, excluding one-off benefits were at 58.1%.
The standout region during the second quarter was the Americas where revenue increased 17% increase over the prior year’s quarter.
In the 15 months since launching its Air Solutions cloud-connected platform, ResMed has transformed into a tech-driven medical device company by liberating healthcare data, improving outcomes, and unlocking value by providing actionable information for patients, physicians, providers and payers.
Cloud-connected devices that sit on a patient’s bedside table – and send data to the cloud, providing actionable information to patients and physicians – are proving to be popular with customers.
ResMed is one growth stock which justifiably trades at a premium to its intrinsic value. But given its growth trajectory, the current 20% premium (to IV) doesn’t look excessive, especially when compared with other ASX-listed stocks that don’t have the same pipe-line of growth that’s wired to global markets.
Given that ResMed is still trading around 20% below its 52-week high ($9.84), and has lots of growth ahead of it – including an enormous untapped global market for its products – the current share price doesn’t make for an overly expensive entry point into the stock.
With the sleep apnoea and respiratory disorders market is becoming more competitive; ResMed could some under some future margin pressure. But the stock’s historical outperformance is impressive, and much of this can be attributed to the leadership of
Michael “Mick” Farrell and his management team.
ResMed’s recent acquisition of US-based Inova Labs – a company specialising in oxygen therapy products – is expected to slightly dilute its 2015-2016 earnings, however it will add to them in the following year as unnecessary costs are stripped out.
Despite the product mix and FX negatively impacting gross margins over the past three quarters – with the US-based stock reporting its financial results in $US – analysts expect ResMed to post sales of $US440 million ($58 million) in its first-half results – up 4% on the previous corresponding period.
They’re also forecasting a net profit after tax of $US93 million, up 2%.
Based on 12-month price targets of around $8.46, ResMed does make for a reasonably attractive entry point.
Buying the stock once it goes ex-dividend might make for an even better entry point.