Stock: Resmed Inc CDI
Stock code: RMD
Share Price: $3.03 (as at Friday 18th March, 2011)
Macquarie Private Wealth (7/3/2011, share price was $3.12 that day)
Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO)
Mired in a year-long decline, on February 2, ResMed announced that after 3 years as CEO and President, Kieran T. Gallahue will resign his position and that the company’s founder and executive chairman, Dr. Peter C. Farrell will replace him. RMD shareholders hope this could be the tonic that halts the current downswing in RMD shares.
In 1989, ResMed was founded in Australia to treat obstructive sleep apnea, the most common type of sleep-disordered breathing and other respiratory disorders. ResMed develops, manufactures, and distributes medical devices such as airflow generators and masks that treat breathing disorders.
ResMed is a global firm, with distribution capabilities in more than 70 countries through wholly owned and independent firms with most of its manufacturing capacity in Australia. RMD generates about half of its sales in the United States, while the other half is dispersed primarily throughout Europe, Japan, and Australia.
ResMed’s revenue for the first quarter of fiscal 2011 increased 14% from the previous year, to $282 million – and taking out currency effects, the change was 17%. The main driver for revenue was the increase in volume growth. Net revenue grew 16% to $155.6 million in the North and Latin American segments (currently North and Latin America account for approximately 50% of revenues). Elsewhere, net revenue expanded 13%, or 19% higher in constant currency terms.
ResMed continues to maintain healthy margins despite some analysts’ forecasting margin compression due to competitive pressures. RMD’s gross profit grew 16% to $174 million and gross margin improved from 60.8% to 61.7%. Management noted that the margin improvement came from new products, cost savings from manufacturing and supply-chain initiatives, and product mix. Considering the negative impact of a stronger Australian dollar, management deserves all the credit. Net income and earnings per share grew 35% and 33%, to $56.7 million and $0.36 in line with expectations.
ResMed’s balance sheet is strong with cash and cash equivalents of $540.0 million and a current ratio of 4.64. There is some concern that inventories on a percentage basis increased higher than sales. Management put this down to rises in the price of materials for new products and the appreciation of the Australian dollar relative to the U.S. dollar.
ResMed competes in the highly competitive medical device industry, where all firms must innovate or face significant pricing pressure. Other big risks for the company include regulatory issues in the United States – namely, how will the new health bill impact margins?
With practically all of its development and manufacturing operations located in Australia, the company manages considerable foreign exchange risk; over 95% of its sales are offshore with the United States accounting for about half of its sales.
The story of RMD has been its ability to maintain margins and growth over the years. The company has continued to perform well despite the weaker US dollar slicing revenues.
Using DCF, current growth rates and margins in order to calculate future cash flows – it could be said that RMD is fairly valued at its current share price.
With an aging population in the United States, RMD has the opportunity to continually increase revenues, provided they maintain their track record of innovation.
ResMed shares have been in an 8-month downtrend since June 2010. Technicians may see support at the previous resistance of $3.00, acting as the next support level.
Positive divergence in the RSI indicator hints that the current downtend may be a little over done.
RMD’s price action implies a downtrend with lower highs and lower lows on the daily chart; whereas the RSI shows higher troughs and an upward trend line. With overall market weakness, any type of support here would be encouraging for RMD bulls. The technical picture tells that the bears are still in control for the moment.
Macquarie Private Wealth Analyst Sean Conlan, who has a buy recommendations on RMD, recently commented that RMD, “makes and distributes medical equipment for sleeping disorders. It reported a NPAT (net profit after tax) of $US115.2 million for the six months to December 31, 2010. It beat consensus by 6 per cent. We believe ResMed offers a strong growth profile.”
Out of 16 analysts covering RMD, 7 have a outperform rating, 5 buy, 4 hold, and no analyst has a sell. Consensus EPS for fiscal 2011 is 15.1 cents and 17.5 cents for the following year. Growth rate forecast is 15.8 per cent.
The last 12 months for shareholders have been disappointing ones to say the least.
To fairly evaluate RMD, one has to take a longer-term perspective and take note that time and time again ResMed has maintained strong margins in a competitive industry, growing and building market share. Given the recent management shakeup and valuation, investors might think about researching further into the outlook for RMD.
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