Revenue Turnaround A Healthy Sign For ResMed

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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
For some time, sleep disorder group ResMed ((RMD)) has been under pressure from high levels of competition and price discounting. This has impacted on revenues and margins. But according to some analysts, the group’s fourth quarter result suggests the worst is now behind it and better results should begin to flow through.

JP Morgan is one to push such a view, suggesting the turnaround in fortunes for the group is now underway. It points out the 4Q result was the equivalent of full year revenue growth of around 16% in constant currency terms, which is the best result the company has achieved for some time.

This should flow through into strong earnings growth and on the broker’s numbers, the company should generate a little more than 20% in average annual earnings per share growth over the next four years. JP Morgan suggests this means there is value on offer at present, as the stock is trading on a price to earnings (P/E) multiple of around 22% on FY09 earnings.

The broker also suggests earnings risk remains to the upside given the potential growth for its home testing product, while it also sees the company as an attractive target for any corporation looking for a quick entry into the sleep disorder market. The broker’s only issue is that of declining margins, as evidenced by the quarterly report, but it expects new product launches and some operational changes will see this brought under control.

While JP Morgan rates the stock as a Buy, Credit Suisse has stuck with its Neutral rating, seeing margin issues as a concern even though 4Q results were a little ahead of what it had expected. While it too expects new, higher margin products and a more efficient supply chain, the broker sees foreign exchange translations as something that could continue to weigh on margins going forward, limiting the stock’s upside.

Citi also rates the stock as a Hold, but this is an upgrade from its previous Sell rating. The broker cites a slightly more attractive relative valuation following recent price weakness. The broker estimates the stock is still on a 32% P/E premium to the market and so still offers little relative value, though the improvement in operating performance means a Sell is no longer justified.

UBS is more positive, as in its view, the introduction of some new products means the company now has a far more competitive range. This should stand it in good stead given sales are now once again trending higher. The broker also likes the overall growth prospects for the stock given the scope for an enlarged market on the back of home testing and so it joins JP Morgan with a Buy rating.

Overall, the FNArena database shows the stock is rated as Buy twice, Accumulate once and Hold seven times, with an average price target of $4.81. This is up from $4.67 prior to the 4Q result.

The median price target according to Thomson One Analytics is $4.68. Today, shares in ResMed are a little stronger in early trading. As at 12.05pm, the stock was up 15c or 3.2% higher at $4.72. This compares to a trading range over the past 12 months of $3.43 to $6.05.

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