Australia | Apr 30 2012
– ResMed quarterly better than expected
– Brokers revise up earnings an price target expectations
– Ratings on the stock still mixed
By Chris Shaw
ResMed ((RMD)) delivered March quarter net profit after tax of US$64.6 million, an increase of 21% in year-on-year terms. The increase in profit outpaced an 11% increase in revenues to US$349.1 million for the period and was above market consensus.
A highlight for Macquarie was strong cost control during the period, this stemming from the achievement of additional operational efficiencies. Gross margin for the period of 60.3% was 90 basis points higher than Macquarie had expected thanks to product mix tailwinds, manufacturing improvements and additional supply chain efficiencies.
At the same time, UBS points out while forex moves during the period were a negative for ResMed this was more than offset by strong mask and high end flow sales and generated a better than expected result. UBS expects ResMed's March quarter performance will continue into the June quarter before a more volatile FY13.
JP Morgan was similarly positive, viewing the result as evidence of a more convincing trend in terms of ResMed regaining market share in the Bi-levels market in particular. Growth in the home sleep testing market has also come faster than JP Morgan had expected and supports the move to lift earnings estimates post the quarterly result.
BA Merrill Lynch was a little less positive on the ReMed quarterly, noting earnings in the period were helped by a lower than expected tax rate and better interest income. While the broker has lifted earnings estimates post the result revenue expectations are largely unchanged given tougher comparable numbers in coming periods and no near-term recovery in the EU market expected.
Even allowing for tougher comparable numbers, ResMed should continue to deliver solid earnings growth. Citi suggests double digit earnings growth is virtually guaranteed in coming years, especially given average mask growth of around 20% in the US market over the past 16 quarters.
Changes in earnings forecasts across the market for ResMed mean consensus EPS estimates according to the FNArena database now stand at US16.2c this year and US19.3c in FY13. Based on these forecasts the consensus price target for ResMed stands at $3.50, up from $3.21 prior to the result. Targets range from RBS Australia at $3.05 to Citi at $4.46.
The FNArena database shows ResMed is rated as Buy five times and Hold three times, with BA-ML downgrading to a Hold rating post the result and JP Morgan upgrading to a Buy. For the former a Neutral rating is now appropriate given the expectation of tougher comparable numbers in coming quarters and the fact the extent of any EU weakness remains unknown.
In contrast, an upgrade to an Outperform rating is justified in the view of JP Morgan as the combination of an impressive net cash position, an ongoing share buyback and potentially more benign funding issues suggest better share price performance.
Also supportive according to JP Morgan is more stabilised underlying market growth of 6-8% in the US, this after several quarters of diminishing growth. While the rest of the world remains challenging for ResMed given current macroeconomic conditions, JP Morgan notes both Germany and the UK delivered encouraging growth during the period.
Despite a stronger market today shares in ResMed have weakened slightly and as at 11.30am the stock was down 1c at $3.25. This compares to a range over the past year of $2.36 to $3.28 and implies upside of a little more than 7% relative to the consensus price target in the FNArena database.
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