Mixed Views On ResMed Following Quarterly

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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

Back in March when home testing for sleep apnoea was becoming more widely accepted in the US market and some insurers were including it in their policies it appeared the key US market for sleep disorder group ResMed ((RMD)) was set to turn more positive but the company’s March quarter result shows the process may take a little longer than some in the market had been hoping for.

As Citi points out the result was in line with estimates at the revenue, EBITA (earnings before interest, tax and amortisation) and net profit lines, the lack of any positive surprise stemming from the fact US sales growth continues to drag somewhat.

This has created a disparity among the Australian broking fraternity as to the outlook for the stock, as ratings range from Buy to Sell depending on whether or not analysts see scope for any improvement from the key US side of the business.

For Citi there is no reason to expect too much at present, the broker retaining its Sell rating as the weaker US economy means there is scope for discretionary purchases to be deferred, making the broker reluctant to upgrade to a Hold rating even though pricing in the market appears to have found a floor.

ABN Amro tends to agree, suggesting ongoing price competition in the US market remains stronger than expected and this is impacting on group margins, a trend it sees as continuing for some time yet. As well the broker notes there are currency issues the company must deal with as it translates earnings back to Australian dollars and together these headwinds make outperformance unlikely in the medium-term.

There is one major potential source of upside in the broker’s view, this being more positive news regarding the recent CMS decision in the US to allow home testing for sleep apnoea. This is also where JP Morgan sees upside, as the broker suggests a move towards more home testing means potential for a shift towards greater take-up of APAP machines, where the company has a strong position.

With the result also suggesting to the broker the company has returned to a market level of growth it expects ongoing improvement in performance, strong enough to generate average earnings per share (EPS) growth of 21% over the next four years.

Also supportive is the fact the company saw the relatively weak US performance as a product-specific factor given a gap in the low flow end of the market, something it has moved to address. With the group also in a solid financial position with net cash of around US$175 million on the broker’s numbers it sees a stock with the potential to outperform and so rates it accordingly.

UBS agrees and points to the release of four new products in the US market in coming months as providing the base for the company to turn around its performance in that market, so it too rates the stock as a Buy at current levels. Macquarie is more conservative and with home testing rulings still coming in the US it sees enough risk for investors to take a more cautious view, so it sees the company as a Hold at current levels while GSJB Were has downgraded from Buy to Hold post the result on a pushing out of its timing expectations for any recovery in performance in the US.

Overall the FNArena database shows ResMed scores two Buys, seven Holds and one Sell, with an average price target of $5.09, down from $5.59 prior to the result. Thomson One Analytics shows a median price target of $5.50.

Shares in ResMed today are slightly weaker despite a stronger overall market and as at 11.30am the stock was down 10c or 2.2% to $4.43, which compares to a trading range over the past 12 months of $4.14 to $6.05.

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