ResMed More Attractive

This story features RESMED INC. For more info SHARE ANALYSIS: RMD

The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Shares in sleep disorder treatment company ResMed ((RMD)) have not participated in the recent rally in equity prices, rather the stock has been sold off of late to what Southern Cross Equities analyst Stuart Roberts suggests is a more reasonable trading multiple of around 19x consensus earnings numbers for FY09.

As Roberts notes, this compares to an average multiple based on consensus forecasts of 28x since the middle of 2004, while the last time the group’s 12-month trailing multiple was this low in 2002 it subsequently rallied strongly.

According to Roberts, the stock is not compelling value at current levels, hence his Accumulate rating rather than a more aggressive Buy recommendation, but there are a number of reasons investors would be well served by looking more closely at the company.

Firstly, he suggests the stock has proven itself to be resistent to recessions, a trend he sees as being confirmed by what should be a good March quarter result due in coming weeks given weak comparables from last year and a lower cost base in recent months.

As well the company is enjoying good business from sleep centres in the US, while it is also well placed to benefit over the longer-term from the move to home testing of sleep disorders. This trend should be supported by the release of a new CPA platform for which the company is currently preparing.

With respect to home testing, Roberts expects this to start to benefit earnings in FY10 and this underpins his forecast of solid earnings per share (EPS) growth in coming years. His forecasts in US dollar terms stand at 17.9c this year, 22.1c in FY10 and 22.7c in FY11. As a means of comparison Thompson One Analystics shows consensus EPS estimates of 19c, 24c and 28c respectively, which suggests some upside to Southern Cross’s numbers.

Price targets reflect the additional upside not being priced in by the broker as the Southern Cross target of $5.50 is below the median target according to Thomson One of $5.88 and the average target according to the FNArena database of $6.06.

The database shows the company is rated as Buy three times, Accumulate once and Hold four times, UBS supporting its Buy rating with the fact the company appears to be gaining market share in the US and the potential for this trend to continue means earnings growth could be above market.

Citi also sees value following the recent share price weakness and to reflect this the broker recently upgraded to Buy from Sell, taking the view in relative terms the stock is now attractive especially given expectations of further strength in the Australian dollar.

Credit Suisse is one of the brokers with a Neutral rating on the stock and this stance is valuation based, so the recent share price weakness might have addressed that concern. As well, Credit Suisse pointed out in its most recent review the company has very little debt, which the stockbroker sees as a positive in the current financial environment.

Shares in ResMed today are slightly stronger in line with the broader market and as at 1.30pm the stock was up 3c at $5.05. This compares to a range over the past 12 months of $3.43 to $6.67.

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