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Treasure Chest: ResMed’s Benevolent Monopoly

Treasure Chest | May 01 2023

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

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today’s idea is on ResMed

Whose idea is it?

Analysts at Wilsons.

The Subject:

Sleep and respiratory care device manufacturer ResMed ((RMD)).

By Greg Peel

ResMed’s March quarter earnings report, released last Friday morning (Sydney time), featured very strong device sales, particularly in North America, as the company was no longer restricted in its ability to supply the US market with cloud-connected devices.

However, brokers were slightly disappointed the boost in sales came at the expense of the gross margin, due to the sales-mix shifting towards lower margin devices and higher component costs, with higher device prices only partially offsetting.

But for stock broker Wilsons, “Short termism on the stock, bemoaning the gross margin impact of success, misses the point”.

Investors should take advantage while the market underestimates the permanence of what has happened in the US sleep market over the past 12 months, Wilsons believes. The situation is “without precedent” and therefore difficult for many to accept but the sleep apnoea device market is operating as a “benevolent monopoly” and no one, except rival Philips, really minds.

In June 2021 Dutch-headquartered Philips was forced to recall its own competitive sleep device due to potential health risks, giving ResMed a leg-up in market share. Brokers have been speculating on Philips’ return to the market ever since, yet that timeline seems to be constantly pushed out.

“Make no mistake,” says Wilsons, Philips is indelibly marked and US Federal Drug Administration will keep going after the company. ResMed would not be rapidly growing quarterly flow generator sales in the Americas unless “rusted on” Philips customers have switched.

In cloud-connected medical technology, “hard won share” is so often permanent share, the broker points out, because it entails system changes to make the switch.

Which is why Wilsons is not the least concerned with gross margins. The broker has an Overweight rating on the stock with a $37.76 target.

More Info:

Despite “bemoaning” the contraction in margins, FNArena database brokers remain net positive on ResMed, offering four Buy or equivalent ratings, including an upgrade to Accumulate from Hold from Ord Minnett, and one Hold, for a consensus target of $38.00, up from $35.98 pre-result.

Brokers remain a little cautious on Philips returning to the market, but ResMed continues to expect devices sales to be sequentially higher throughout 2023, and as the supply chain situation continues to improve, the March quarter should be the bottom for the gross margin.

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