Australia | Jan 29 2013
-December quarter beats estimates
-But how much upside?
-Solid earnings should continue
-Stock should withstand competition
By Eva Brocklehurst
Sleep disorder product specialist ResMed ((RMD)) has received a warm reception from brokers as it delivered a strong December quarter. However, there are some doubts as to how much further upside can be expected as the stock has bettered forecasts substantially.
Margin was again the driver, at 61.8% in the second quarter it was 90 basis points higher than Macquarie had expected. Product mix and supply chain efficiencies contributed to revenue growth of 14%. Citi maintains some of this must also be attributed to market share gain, and has upgraded FY13-14 earnings forecasts by 3% and 4%, lifting its price target to $5.26 from $4.81. The result was 10% better than what JP Morgan was expecting and that broker has lifted earnings estimates too, raising the price target to $4.91 from $4.51.
Deutsche Bank believes solid earnings growth will continue, underpinned by margin expansion. This broker sees upside coming from better pricing outcomes from the CMS round 2 competitive bidding and market share gains. Downside is seen in adverse foreign exchange moves and a bigger impact from competitive bidding. UBS, meanwhile, believes the company has important growth in its high margin products and this should stand it in good stead in the face of competitive bidding price negotiations. JP Morgan also believes ResMed has sufficient brand power to hold the competition at bay.
JP Morgan and BA-ML note ResMed's momentum is driven by factors such as the ongoing move to Home Sleep Testing (HST) while the production shift to Singapore and Malaysia is supportive of further growth. Citi highlights the fact that, as Singapore manufacturing increases so the tax rate falls. Macquarie has reduced tax rate assumptions to 20.8% from 22%, citing the increasing manufacturing initiatives in Singapore.
ResMed faces competition but the brokers are expecting it to withstand this, however, some question the sustainability of its growth. CIMB feels this way, as does BA-ML. So, these brokers, while raising earnings estimates, are reluctant to hype the call. CIMB retains a Hold rating and sets its target to $4.22 from $3.88. BA-ML has downgraded ResMed to Hold from Buy, citing a lack of sufficient new valuation upside. A 7% share price rally has eclipsed BA-ML's price objective hence, while the broker has raised its target to $4.64 from $4.40, the rating was downgraded. Deutsche Bank has maintained a Hold rating, citing limited upside for its price target, while UBS also keeps it at Hold.
Macquarie finds the US market is healthy and reckons growth in this area has some way to run. The broker was particularly impressed with US mask growth of 16%, which it said should alleviate concerns around Medicare's mask replacement guidelines crimping growth. However, Macquarie remains concerned about competitive bidding in the round 2 negotiations.
Pulling this together FNArena's database has consensus earnings forecasts at up 31.3% for FY13 and 13.6% for FY14. There are now six Hold recommendations and two Buy (JP Morgan and Citi). The price target ranges from $4.22 (CIMB) to $5.26 (Citi), giving a consensus target price of $4.70 reflecting 2.5% upside.
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