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ResMed: Philips Remains The Big Unknown

Australia | Jan 31 2023

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

Lack of competition, alongside improved component supply, sees ResMed deliver a strong second quarter.

-ResMed delivered a strong fourth quarter as component supply improves
-Strong sales of cloud-connected devices in the US underpinned the result
-Questions remain about market re-entrance by Philips, and the exact impact

By Danielle Austin

The impact of improving component supply, and particularly availability of key semiconductor chips, was evident from RedMed’s ((RMD)) fourth quarter result release on Friday. With the medical device company continuing to ramp-up device production as component supply improves, better availability of devices has led to a stronger sales performance in the quarter.

A highlight of the quarterly update was a strong performance from the company’s US division. Device sales from the region were up 41%, with rest of the world sales declining -5%, with increasing uptake of devices. Improved component supply has positively impacted on availability of ResMed’s cloud-connected devices, with sales of the re-engineered connected AirSense 10 device and the newer AirSense 11 device underpinning the result, and ResMed planning to phase out its card-to-cloud devices.

At a group level, ResMed lifted its revenue 16% to US$1,034m and its earnings 14% to US$305m. Revenue exceeded the US$1bn mark for the first time in a quarter.

ResMed remains confident not only that it can deliver sequential quarter-on-quarter device sales increases over the remainder of the fiscal year, but that it can continue to grow even following the (eventual) return of Philips to the market. The company expects component supply will continue to improve over the remainder of FY23. A more favourable mix, with increased sales of cloud-connected devices, should support ongoing sales growth. 

Competitor market re-entry looms over ResMed’s outlook

Brokers largely consider the potential return of competitor Philips to the market to be the biggest unknown impacting ResMed’s outlook. Anticipating Philips will fully re-enter the market at the end of 2023, Citi (Buy, target price $39.00) notes an update from the company could be forthcoming given Philips is due to release its full year result by the end of the month. The broker also expects Philips will provide details on the strategic direction of its sleep business. 

At this point, Philips remains in discussion with the US Department of Justice and Food and Drug Administration (FDA) on a proposed consent decree, and Citi notes there are a range of potential outcomes from these conversations. 

While also considering a market re-entry from Philips to be a catalyst for ResMed, Macquarie (Outperform, target price $37.85) remains positive on the latter’s medium-to-longer term outlook. This broker anticipates ResMed can deliver on targeted robust quarter-on-quarter device growth, and improved margins over the second half. 

Credit Suisse (Outperform, target price $37.50), meanwhile, feels the market continues to underestimate longer-term benefits for ResMed from the Philips recall, anticipating a significant backlog still to address. This broker expects ResMed can hold a 70% market share in FY25, following its main competitor’s return to market. 

Offering a relatively upbeat take on the company’s update, Morgans (Add, target price $37.24) noted RedMed continues to benefit from heightened post-pandemic hygiene and health awareness.

While acknowledging Philips looks likely to remain non-competitive for most of 2023, and that ResMed delivered a strong second quarter, Morgan Stanley (Equal-Weight, target price $30.80) prefers to remain conservative on the company’s outlook until it has better sight on a clear path to full chip supply.

Should ResMed prove it can deliver earnings per share in FY24 10% ahead of Morgan Stanley’s current expectations, which the broker notes could come from a further delayed return to market by Philips, the broker would have more confidence in an upgraded rating.

Elsewhere, Goldman Sachs retained its Buy rating alongside a target price of $38, Jarden lifted its price target to $35.90 from $34.56 alongside an Overweight rating, and Wilsons equally stuck with its Overweight rating and a price target of $38.24.

Yesterday, the shares closed at $31.36 in Australia.

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