ResMed’s Bounce-Back Complete

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

A stellar first quarter has underscored ResMed’s share price bounce-back from last year’s obesity drug panic, and perhaps put to bed the initial fear of GLP-1s.

-ResMed posts first quarter beats across the board
-Share price has now regained what was lost due to GLP-1s
-Earnings headwinds towards net cash in FY25
-New devices offer additional promise

By Greg Peel

From July to December 2023, ResMed’s ((RMD)) share price fell some -37%, driven by the sudden rise of GLP-1 obesity drugs. Sleep apnoea is a condition suffered disproportionately by overweight people, and the assumption was GLP-1s would kill the market for ResMed’s sleep apnoea devices. ResMed, it seemed, would become redundant.

Not all saw it that way nevertheless. Analysts at the time questioned the hyperbole, and the share price response. Aside from the fact GLP-1 drugs are expensive, thus limiting demand, and that weight would return as soon as patients stopped taking the drugs, many argued GLP-1s could actually work the other way for ResMed highlighting the availability of sleep devices as alternative or complementary treatment, thus increasing demand.

Well, they were right, at least to the extent that ResMed’s share price is not just back to its July 2023 price but beyond it, and its valuation multiples at the time have also been regained.

At a 20x enterprise value to earnings multiple, says Wilsons, the stock has “done nothing other than recapture what it should never have lost, amid last year’s GLP-1 driven nonsense”. In 16 years of covering the stock, the broker continues, “we’ve never seen secular demand drivers to match what’s happening now externally and internally”.

While it remains “early days”, Morgans continues to view ResMed as well positioned to leverage growing awareness of sleep conditions from consumer wearables and weight loss drugs via the use of data analytics, moving upstream in diagnostic pathway to help patients better access information on screening, diagnosis and eventually treatment.

Over the medium to longer term, suggests Macquarie, revenue growth is expected to be complemented by demand generation initiatives, with GLP-1 medication and consumer OSA (obstructive sleep apnoea) detection technology supportive of new patient diagnosis/flow.

That said, there remains a slight element of uncertainty.

While the medium-term challenge from obesity drugs remains uncertain, says JP Morgan, this broker expects ResMed’s PE multiple to continue to expand supported by the strong earnings growth and diminishing fears GLP-1s will negatively affect demand.

Given that GLP-1s and the existence of a potentially “lighter society” in the long term are still largely seen as negative by UBS, and by investors, the broker believes a positive thesis on ResMed needs to be founded in the potential for earnings upgrades rather than substantial PE multiple expansion from current levels.

But on the other hand, UBS sees data pointing towards real benefits coming through short to mid-term from either GLP-1 use or wearables being a major positive and driver of such upgrades, and this broker is waiting to see if anything like this emerges.

Citi continues to view GLP-1s as a potential risk medium/long term, which needs to be balanced with the strong near-term operating performance and earnings momentum.

Jarden is contemplating whether the awareness of OSA caused by GLP-1s and the potential additional upside from wearable technologies will be enough to offset the longer term GLP-1 impact the broker incorporated into forecasts back in October 2023. At the time, Jarden downgraded its earnings forecasts, impacting valuation by -16%.

To date, there has been no noticeable impact from GLP-1s, Jarden notes, which is consistent with the broker’s expectations, having incorporated slowing growth from FY26. Jarden will continue to assess this but, in the meantime, ResMed remains one of this broker’s preferred picks.

Whatever their views, brokers do agree on one thing. ResMed posted a cracker of a first quarter performance.

Beat Across the Board

ResMed’s first quarter report featured an 11% beat on consensus revenue forecasts and 34% on earnings.

Strong growth was seen across key geographies and product segments, Morgans notes, with masks benefiting from new patient set-ups, resupply and new products, devices supported by AirSense 10 and 11 cloud-connected platforms, and the HME (home medical equipment) channel driving residential software.

Sleep and respiratory sales rose by 11% in both the Americas and rest-of-world. Across product categories, masks grew by 10% and devices by 11%. SaaS sales grew by 13%, benefiting from strength in Medifox Dan as well as the HME channel (Brightree).

Gross product margin surprised to the upside (yet again, Morgans notes), as numerous tailwinds, such as manufacturing efficiencies, cost control, and higher advanced sleep-wake phase disorder (ASP) diagnosis, offset ongoing freight headwinds. The gross product margin is expected to gradually improve throughout FY25.

Gross margin increased 10 basis points sequentially to 59.2% to be in line with consensus and guidance. ResMed continues to expect ongoing manufacturing efficiencies and component cost improvements. Growing more AirSense 11 volumes should help unlock further scale advantages, Jarden points out, as the cost of goods sold on the AirSense 11 is less than on the AirSense 10 by some -10%.

Freight remains the only headwind at this point, which can be mitigated by further shifts from air freight to sea freight but also the recent strategy to build pockets of inventory globally. Importantly, says Jarden, ResMed acknowledged in time gross margin can grow beyond 60% as further efficiencies and freight rates eventually unwind.

The momentum in Medifox Dan and Brightree could deliver gross margin upside in the SaaS business, Jarden suggests.

Onward Ever Upward

Public awareness of the availability of obesity drugs has risen rapidly, notes JP Morgan, but as yet the impact on rates of sleep apnoea diagnosis have been modest. This broker expects this to change in 2025 after the impending label expansion which JP Morgan expects to be accompanied by widespread consumer marketing campaigns, lifting awareness of sleep apnoea and its links to weight.

This in turn should drive a noticeable lift in patients seeking sleep tests and supporting strong demand for ResMed’s sleep therapies.

Consensus is forecasting revenue growth to decelerate to 8%/7%/6% over FY25-27 due to the return of competitor Philips to the US market, and the headwind from GLP-1s on devices and masks. This seems too conservative, in Citi’s view.

Over 2010-19, both devices and masks grew at an average rate of 10%. In devices (52% of revenue), the shift to AirSense 11 will likely remain a revenue tailwind (higher ASP) to FY25 and FY26, Citi suggests, after which growth will be dependent on volume growth.

In masks (35% of revenue), the launch of new products (AirTouch fabric mask in the second quarter) and ongoing resupply efforts should result in high single-digit to low double-digit sales growth, Citi believes.

SaaS (13% of revenue) growth is expected to remain high single digit to low double-digit accretive to overall group growth. Potential bolt-on M&A could also enhance revenue growth. Citi now forecasts FY25-27 revenue growth of 10%/9%/8%.

Solid Balance Sheet

ResMed will be net cash by end-FY25 on UBS’ estimates and, per company commentary, during the second half of FY25. Share buybacks will continue at the increased rate of US$75m per quarter for the remainder of FY25 (up from US$50m previously). UBS thinks the company’s net cash position by year-end increases the likelihood of more substantial buybacks later on, and more so as the business becomes more cash generative.

Given unchanged commentary around the possibility of bolt-on acquisitions, UBS believes the company is likely to go this route only when an M&A war chest and the R&D budget are amply serviced.

ResMed delivered $325m of operating cash flow in the quarter and remains on track for over $1.5bn in FY25. With the remaining debt at attractive fixed rates, JPMorgan expects cash to start to build, explaining the expanded buyback program.

Trading on a 20.4x PE, ResMed’s multiple has regained everything it lost to the GLP-1 “panic” a year ago, Wilsons notes. To frame the multiple historically, one would need to go back to late 2019 after ResMed had usurped Philips as global leader in CPAP (continuous positive airway pressure) via the AirSense10/AirView/Brightree “connected care” campaign, but was yet to encounter/endure the volatility of covid, the Philips recall, and associated supply disruptions.

Wilsons has an Overweight rating on ResMed with an increased target of $42.18. The broker concludes its summary of the first quarter result with “Keep buying ResMed”.

JPMorgan retains Overweight, lifting its target to $41.00 from $37.00. Jarden is on Overweight, with a target increase to $36.60 from $33.83.

Among brokers monitored daily by FNArena, Morgans has an Add rating, Macquarie is on Outperform and Ord Minnett has Accumulate, which is one notch below Buy.

The two brokers still a little concerned about GLP-1s, UBS and Citi, are both on Neutral.

The current consensus target price is $38.84, up from $36.14 previously, however this is complicated by the fact UBS quotes a target in US dollars and thus is not included and Morgan Stanley (Overweight; $33.70) has not updated on ResMed since June.

If we exclude both UBS and Morgan Stanley the remaining consensus target is $40.12.

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