RSMDF - A First Look At ResMed

2024-01-09 12:38:56 ET

Summary

• Today, we take our first look at ResMed Inc., a San Diego-based company with two primary business segments: Sleep and Respiratory Care, and Software as a Service.
• The company's products and services are aimed at a huge global market and ResMed is seeing solid revenue growth.
• The stock has had a nice rally from its late October lows. Will the rise continue in 2024?  An analysis follows in the paragraphs below.

You can sway a thousand men by appealing to their prejudices quicker than you can convince one man by logic ."? Robert A. Heinlein.

Today, we take our first look at ResMed Inc. ( RMD ). The company has been in the news lately, as ResMed announced a slew of management changes on November 9th when they disclosed their President and Chief Operating Officer was stepping down. In addition, the company also appointed a Chief Marketing Officer, a Chief Product Officer and a Chief Revenue Officer. These changes were made as part of the company's new operating model aimed at boosting long-term growth.

Six weeks later, the company sent out an alert around one of its products. After a steep decline over the summer, the stock has started to rebound since late October within the overall market rise. Can the rally continue in 2024? An analysis follows below.

Company Overview:

This San Diego-headquartered concern has two primary business segments: Sleep and Respiratory Care, and Software as a Service. The former unit supplies ventilation devices, diagnostic products, mask systems and other products for use in the hospital and home. These medical devices and products are designed to makes sleeping and ventilation easier. The Software as a Service business, which will be known as SaaS in this article, provides several products and applications such as AirView, which is a cloud-based system that enables remote monitoring and changing of patients' device settings. ResMed now has 16 billion nights of de-identified medical data in the cloud and over 22.5 million 100% cloud connectable medical devices, according to its most recent earnings call transcript .

The stock currently trades just north of $170.00 a share and sports an approximate market capitalization of approximately $25 billion. The company operates through a fiscal year that begins on July 1st.

The company is addressing a very large market. Over 2 billion people worldwide suffer from sleep apnea, chronic obstructive pulmonary disease, respiratory insufficiency due to neuromuscular disease, and insomnia according to management. While there are some concerns, the new GLP-1 drugs will lower that population substantially over time, that yet remains to be seen.

First Quarter Results:

The company posted its fiscal Q1 2024 numbers on October 26th. The company delivered non-GAAP earnings per share of $1.64 a share, slightly above the consensus. Net income was up nine percent from the same period a year ago on a non-GAAP basis. Revenues rose 16% on a year-over-year basis to $1.1 billion, $10 million south of expectations.

Revenues from ResMed's SaaS business grew 32% on year-over-year basis. These results were help greatly by the company's acquisition of MEDIFOX DAN in Germany that was completed late in 2022. Organic revenue growth was up seven percent, equating for that purchase. The company got 10% overall revenue growth from the United States, Canada, and Latin America region, and 18% from Europe and Asia in constant currency terms.

Gross margins fell 250bps from Q1 2023 to 54.5%. Management blamed the fall in margins primarily on " a field safety notification on its Astral ventilators, along with higher component and manufacturing costs ."

Analyst Commentary & Balance Sheet:

Since first quarter results came out, three analyst firms including JPMorgan have reissued Buy ratings on the stock. Price targets proffered ranged from $160 to $175 a share. Both Jefferies ($158 price target) and Jefferies ($200 price target) maintained Hold ratings

Approximately four percent of the outstanding float in the shares is currently held short. Several insiders were frequent and consistent sellers of the equity throughout 2023. In the fourth quarter of last year, they disposed of just over $2.1 million worth of equity collectively. ResMed ended the third quarter with nearly $210 million worth cash and marketable securities on its balance sheet according to ResMed's third quarter 10-Q . The company listed long-term debt of $1.351 billion. ResMed produced operating cash flow for the quarter was $286.3 million in the third quarter, and it paid out $72 million worth of dividend payouts.

Verdict:

The company made $6.44 a share in FY2023 on sales of $4.22 billion. The current analyst firm consensus has profits rising to $7.18 a share in FY2024 as revenues grow by some $400 million. The projected earnings are for $7.96 a share in FY2025 on sales growth of six percent.

With the recent run higher in the ResMed Inc. stock price, the shares are trading above two buy-rated analyst price targets and up against near the third one that was issued after first quarter data hit the wires. The stock also trades at 24 times FY2024E earnings and 5.5 times revenues. The shares also pay a 1.1% dividend yield.

Not outlandish valuations given ResMed's growth prospects, but hardly compelling, either. Therefore, I have no investment recommendation around RMD at current trading levels.

Those who are capable of tyranny are capable of perjury to sustain it ."? Lysander Spooner.

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