Good Times To Continue For ResMed

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

The December quarter was a good one for sleep disorder group ResMed ((RMD)) as it delivered earnings well above market expectations, Deutsche Bank noting this was despite a competitor launching a new product into the market.

Net profit for the quarter was US$46 million, which equated to earnings per share of US6c for the period, driven by market share gains that saw revenues come in above market estimates. The only disappointment, according to JP Morgan, was gross margin, as at around 59.7% it was a little below its forecast due largely to adverse currency movements. On a positive note, JPM expects cost saving initiatives will go some way towards offsetting these pressures.

What should also offer a boost in FY10 and FY11 in JP Morgan’s view is new product launches by ResMed, which the stockbroker sees as driving market share gains in masks and glow generators.

To factor in these initiatives plus its house views on currency markets JPM has lifted earnings forecasts by 4-7% for FY10-FY13. In EPS terms this translates into US22.7c this year and US24.8c in FY11. The changes have been enough for JP Morgan to upgrade to a Neutral rating from Underweight previously.

By way of comparison Deutsche Bank’s EPS forecasts stand at US24.1c and US29.4c for FY10 and FY11 respectively, up from US22.7c and US27c, as Deutsche sees better top line growth in coming periods given what it sees as strong demand and an ongoing move to homes testing.

Credit Suisse has also lifted its EPS forecasts to US23.6c in FY10 and US27.6c in FY11, the broker continuing to take the view ResMed is in something of an earnings sweet spot at present thanks to solid volumes growth, a favourable market structure and a likely ongoing shift in the market to higher margin products.

Valuation also remains favourable in Credit Suisse’s view as on its numbers ResMed is trading on an earnings multiple of around 20 times 12-month forward consensus earnings at present. This is a 19% discount to the stock’s five-year average and a 40% premium to the market, down from a five-year average premium of 67%.

According to UBS, earnings risk remains to the upside thanks to both ongoing growth in the sleep disorder market and its view ResMed will continue to gain market share gains as the company rolls out its new S9 product in the US and European markets. UBS sees this as being the number one device in the market place to incentivise patient compliance and mask replacement.

UBS also expects home testing will begin to deliver in FY10 and to reflect its positive view the stockbroker is forecasting EPS for ResMed of US27.5c in FY10 and US39.1c in FY11, putting it well above consensus numbers of US22.9c and US26.4c respectively.

Citi lifted its EPS estimates by 13-14% for both FY10 and FY11 post the quarterly result and despite the increases it suggests earnings risk remains to the upside. Citi is positive on the likely performance of the S9 flow generator and recent masks the company has introduced to the market.

The FNArena database shows ResMed is rated as Buy six times and Hold four times, RBS Australia one sticking with its Hold rating on valuation grounds while Bank of America Merrill Lynch retains its Buy following some increases to its earnings estimates.

Post the quarterly result the FNArena database shows an average price target of $6.53, up from $6.11 prior to the release of the quarterly result. JP Morgan remains the low marker with a target of $5.75, while Citi leads the way with its $7.86 target.

Shares in ResMed today are slightly weaker and as at 10.35am the stock was down 4c at $6.30, which compares to a range over the past year of $4.46 to $6.58.

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