Australia | Oct 29 2012
– ResMed quarterly well received
– Margins stronger on improved product mix and efficiencies
– Brokers lift forecasts and price targets
– Competitive bidding concerns temper ratings
By Chris Shaw
Sleep disorder group ResMed ((RMS)) delivered a well received quarterly result, revenue of US$340 million largely in line with or better than expectations and earnings exceeding expectations thanks to an improvement in gross margins during the period.
BA Merrill Lynch suggests the key theme of the result, which saw earnings per share (EPS) of US50.5c come in 5% better than the broker had forecast, reflected a greater mix of high end APAP and Bi-Level Flow Generator sales.
As well, Deutsche Bank notes ResMed achieved some positive supply chain and manufacturing efficiency gains during the period that helped boost gross margin to 61.4%. This compares to Deutsche's forecast for margins of 60.7%. Management at ResMed has guided to gross margins remaining between 60-62% for the balance of FY13.
A contributing factor to the result in Macquarie's view was a healthy underlying market, as top line growth for the period was 12%. Macquarie suggests the solid gains achieved over the past few results should ease remaining concerns with respect to any slowdown and saturation in the market.
Changes to forecasts reflect this, as Macquarie has lifted earnings estimates for ResMed by 5-6% through FY15 post the quarterly report. Others have reacted similarly, as Deutsche's numbers have been increased by 7-8% and BA-ML by 8-10%.
The changes have boosted price targets for the stock, as the consensus target for ResMed according to the FNArena database now stands at $4.17, up from $3.78 prior to the quarterly report. Targets range from JP Morgan at $3.72 to Citi at $4.67.
With the current share price implying upside of only around 5% relative to the consensus price target, broker ratings for ResMed remain split between Buy and Hold, with three Buy ratings and five Hold recommendations following a downgrade to Hold from Buy fro Credit Suisse, given a solid run in the share price.
One issue for UBS, which has a Neutral rating, is potential for further negative newsflow for ResMed in the next couple of months in relation to competitive bidding. While management expects minimal impact from the process, UBS cautions any negative outcome could see ResMed shares trade lower, so offering a better opportunity in the stock.
Macquarie also takes a cautious view with respect to competitive bidding, noting while little in the way of pricing pressure has been evident in round one regions and the process applies to only 25% of ResMed's volumes, there remains the potential for an earnings impact as the process continues. Macquarie rates ResMed as Neutral.
BA-ML retains a Buy rating on ResMed, suggesting the risks associated with competitive bidding are being reduced by a positive mix-shift as more high end products are sold. This is significant, BA-ML pointing out more irrational pricing, where competitive bidding may have the most significant impact, tends to occur in the low-end CPAP space.
As well, BA-ML takes the view the market is not fully appreciating the out-year potential of ResMed's market leading position on “informatics” systems, as well as the potential for gains from new product launches on coming years.
Citi agrees with BA-ML's Buy call on ResMed, noting the company should deliver EPS growth of 15-20% annually in coming years, with upside risk depending on foreign exchange moves and further share buybacks.
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