The healthcare unicorn that is back on track and posting strong numbers – Chris Conway

In February this year, when ResMed (ASX:RMD) last reported, the company was still recovering after falling as much as 30% amid fears over the impact of GPL-1 weight loss drugs on its business.

Those days are a distant memory, with the company delivering solid results overnight, with CEO, Mick Farrell, saying that weight loss drugs are “not a headwind to ResMed, right now (they are) a strong tailwind. Instead of less patients, it is more.”

Airlie Funds Management’s Vinay Ranjan agrees, saying that while the stock will continue to jump around on news flow about GLP-1’s, its earnings increase that drives the share price at the end of the day.

“We’ve got double-digit earnings growth pencilled in for FY25. Our channel checks with sleep physicians point to a backlog of patients waiting to get tested, while our calls with distributors point to ResMed having as much as 80-90% market share in the key US market.

“So we think it’s just a matter of being patient and letting those financial results come through”, says Ranjan.

In this wire, Ranjan takes investors through ResMed’s latest result and explains why the team at Airlie still holds it as one of their largest positions. He also explains why ResMed is so rare from a valuation perspective.

Key results

• Revenues came in at US$1.22 billionup 9% on a constant currency basis, in line with forecasts
• Operating income came in at $400.5 million ex-items, ahead of expectations of around $388 million
• Gross margin grew to 59.1% – the fifth consecutive quarter of gross margin improvement
• Quarterly dividend up 10.4% – to 53cps from 48 cps – payable 19-Sep-24; record 15-Aug-24
• For more financial data on ResMed, head to Market Index.

Note: This interview took place on Friday 2 August 2024.

1. In one sentence, what was the key takeaway from this result?

The key takeout is that ResMed continues to deliver strong operating performance, despite the continued uptake of GLP-1 drugs, with the company posting 30% EPS growth this quarter.

2. Were there any major surprises in this result that you think investors should be aware of?

There are probably three key surprises;

1. On the positive side, gross margins spiked to 59.1% despite the impact of elevated freight costs.

That’s the fifth consecutive quarter of gross margin Improvement and it’s the highest gross margin ResMed has printed since FY21.

2. On the balance sheet, ResMed repaid about $300 million of debt during the quarter. So, going forward their interest bill is going to be less than $5 million, versus $46 million in FY24 – so a big saving.

3. On the negative side, the device growth in the US was slower than expected, at about 4.9%. Given they took some price increases during the year, it reads as though volumes were a bit soft in a market that has typically grown around a mid-single-digit growth rate.

3. Would you buy, hold or sell this stock on the back of this result?

Rating: BUY

ResMed is still a BUY for us. It is one of the largest positions in our fund.

The easy money has been made trading it from $21 in September to about $30 plus today, but the stock is still only on 24x P/E and it’s historically traded about 28x.

It’s very hard to find a globally exposed company on the ASX that’s trading on less than 30x, particularly in the healthcare sector.

You think of names like Cochlear and Fisher and Paykel, they’re trading on more than 40x P/E. We think for the patient, long-term investor, there’s a re-rate scenario that could play out.

If that happens, the stock is probably worth $40+. That’s the opportunity from now.

4. What’s your outlook on this stock and the sector over the year ahead?

The outlook is positive. The stock will continue to jump around on news flow about GLP-1’s but, at the end of the day, it’s earnings growth that drives the share price.

We’ve got double-digit earnings growth pencilled in for FY25. Our channel checks with sleep physicians point to a backlog of patients waiting to get tested, while our calls with distributors point to ResMed having as much as 80-90% market share in the key US market.

So we think it’s just a matter of being patient and letting those financial results come through.

5. Are there any risks to this company and its sector that investors should be aware of?

The key risk is the device growth in the US. That’s the number that everyone watches.

ResMed is cycling some pretty big comparables in the previous year. So I think any softness in that could impact the stock in the short term.

But I don’t think there’s any change in the long-term equation of mid-single-digit growth for devices and high single-digit growth for their masks and accessories business.

6. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general?

Rating: 4

I’m going to say four, towards the expensive side, but I think that’s at an aggregate level.

I think the market has been driven by some pockets of exuberance. I think every active fund manager in Australia is probably underweight the four major banks, which have driven more than 50% of the index return over the last 12 months. We don’t have a different view there and we think it’s a key area of ​​risk.

On the other hand, you’ve got the resources sector which has materially underperformed. You’ve got commodities like iron ore and lithium, which is on its knees. So naturally, we think that’s probably a good hunting ground for opportunities.

Overall, we think it’s a pretty good setup. If you stay out of some of those areas of exuberance, there are still opportunities for bottom-up stock picking.