Australia | Apr 26 2007
By Chris Shaw
ResMed (RMD) has for some time been one of the top rated stocks in the FNArena database, the stock garnering six Buy ratings compared to just two hold recommendations and price targets that suggested significant upside.
The gloss has come off the stock to some extent though after a disappointing quarterly profit report, which was far weaker than the market had expected even though most experts had factored in more difficult trading conditions.
JP Morgan notes the market was looking for revenue growth of around 20% and the company produced a 13% increase, still above the broker’s 10% forecast. The reason was an increase in price discounting from major competitor Respironics, which meant while total sales revenue was higher earnings per share for the period were flat.
The weaker result has led to a range of downgrades to estimates across the market, UBS lowering its earnings per share (EPS) forecasts by 5% this year and 8.3% in FY08 to US159c and US188c respectively.
Credit Suisse has made similar changes, cutting its EPS estimates by 5.5% and 14% respectively to US155c and US172c, the broker suggesting a recovery in sales growth and gross margin is likely to now be apparent in FY09. While ABN Amro has similarly cut its forecasts in FY07 by 9.6% and in FY08 by 4.1% to US139c and US174c the broker points out gross margins are unlikely to be impacted as the company is discounting older equipment but increasing sales in high margin products.
The broker is also positive on the impact of the introduction of the company’s new Tango machine, which should improve its competitive position as it is a lower-priced machine.
Longer-term there seems little reason for the current price discounting in the market to continue, JP Morgan pointing out if the current environment were to continue longer-term it would have negative implications for both companies.
It sees the stock as good value at current levels, noting the fall in the share price on Tuesday following the result has brought it down to the lower end of its historical P/E (price to earnings) band at around 23.9 times, implying a buying opportunity. JP Morgan agrees, noting its revised valuation of $6.32 implies a significant amount of downside is already priced in to the stock.
The broker also suggests there is a chance the company could reinstate its share buyback program given the current share price weakness, while there is always the chance the company will become a target for a larger player in the medical industry.
While positive, Credit Suisse implies there is not a great hurry to get set in the stock as the price discounting in the market appears to have not yet fully played out and so is likely to impact on coming quarters. UBS sees potential for momentum to recover in the September quarter as the company introduces new products into the market.
By this time the company’s product recall may have fully impacted, the announcement several hundred thousand devices would be recalled estimated to cost the company around US$60m.
While UBS suggests there is a chance the action will impact negatively on the company’s reputation and so have a longer-term impact Credit Suisse suggests the pro-active approach of management should limit any damage to a one-off earnings impact.
The earnings downgrades across the market have impacted on the average share price target for the stock, the FNArena database showing this now stands at $6.68 from $7.25 previously, while the median price target according to Thomson One Analytics was $7.35 (probably to be revised in the days ahead).
Shares in ResMed have gained today in a stronger market, as at 1.15pm the stock was up 18c at $5.26.