Australia | Aug 08 2011
– RedMed quarterly delivered in key areas
– Forex pressures continue to impact
– Growth outlook still solid, diversification a benefit
– Buy ratings still dominate broker views
By Chris Shaw
Sleep disorder group ResMed ((RMD)) reported 4Q11 earnings last week and the result had been viewed as an important test given Flow Generator sales, a key market for the company, had been sliding in the US in previous quarters.
For BA Merrill Lynch the result was therefore a solid one, as US Flow Generator growth of 3% was better than the 2% forecast for the period. This suggests Bi-Level sales have now stabilised, while the result also offered evidence of a positive mix shift from CPAP to APAP or Auto-Set Home Sleep Testing models.
This is key for BA-ML, as the mix shift implies a progressive strengthening of earnings growth through FY12. It is this earnings growth outlook that underpins the stockbroker's Buy rating on the stock. UBS agrees, noting the 4Q result showed US flow generator sales have again turned positive, with this positive momentum likely to follow-on into FY12.
Not all analysts were so impressed by the result, as RBS Australia was concerned by the potential for ex-US sales weakness to continue and the fact the bottom line was supported by a lower tax rate and US$8.3 million in interest in the period.
Goldman Sachs also saw enough in the result to lower earnings estimates by 7% in FY12 and by 6% in FY13, this reflecting reductions to gross margin and volume growth assumptions. The other issue for Goldman Sachs and RBS is the exchange rate, Goldman Sachs noting assuming current spot forex rates relative to FY13 earnings would reduce its price target to $2.90 from a current $3.25.
While adverse currency moves are also an issue for Bell Potter, the broker suggested one positive of the 4Q result is ResMed is managing costs well, while cash on hand continues to build. The cash is being put to use in diversifying the business via acquisitions, a trend RBS expects will continue over the medium-term.
Citi was most bullish on the result and the outlook for ResMed, viewing gross margins in the quarter as better than expected as a mix shift to high end flow generators continues and as ResMed continues to gain market share in the mask business.
Stronger margins meant the result was better than both Citi's forecast and market consensus and sees Citi lift estimates by 3% in FY12 and by 5% in FY13. Macquarie also made minor increases to earnings estimates post the quarterly market update.
While the weaker US dollar could push down margins in the first quarter of 2012, the mix benefits being achieved should see margins increase further in FY12 in Citi's view. Cost control was also identified by Citi as a key, as ResMed has the ability to size operating expenses for market growth.
In the quarter ResMed expanded into the respiratory ventilation market via the launch of the Stellar 100 and 150 products in the US and Europe, the signing of a US hospitals and related market distribution deal for both products and the acquisition of Grundler in Germany.
Further activity in the area is expected in Citi's view, which should accelerate the expansion of this business. The benefit of such an expansion is the Respiratory Ventilation business is highly complementary to ResMed's existing Sleep Disorder business.
Given consensus earnings per share (EPS) estimates for ResMed according to the FNArena database stand at US15.7c in FY12 and US19c in FY13, the market appears reasonably positive on the growth outlook. The timing of this growth is the issue dividing market views, as RBS for example sees current forex pressures as enough to keep the stock range bound over the shorter-term.
BA-ML sees FY12 shaping as a year of two halves for ResMed, expecting forex pressures will begin to ease by the second half of FY12. This suggests some upside earnings risk from any success in high margin areas such as Ventilation, Bi-Level and APAP.
Citi argues at a 2013 earnings multiple of around 15 times ResMed is attractively priced given the growth outlook, even allowing for current forex risks. This is especially the case as current forex headwinds are likely to turn to tailwinds over time, while Citi suggests growth should also be boosted by ResMed potentially making use of its strong net cash position.
Credit Suisse offers a similar view, suggesting the growth outlook for ResMed over the next few years is enough to justify the current earnings multiple on the stock.
Overall the FNArena database shows ResMed is rated as Buy five times and Hold three times, while Goldman Sachs also rates the stock as a Hold and Bell Potter has upgraded to Accumulate from Hold.
The consensus price target according to the database is $3.45, which implies upside from current levels of around 28%. Shares in ResMed today are slightly weaker and as at 12.00pm the stock was down 3c at $2.65. Over the past year ResMed has traded in a range of $2.61 to $7.22.
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