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Mid-Cap

Should you buy Resmed ?

October 31, 2014 | Team Kalkine
Should you buy Resmed ?

Stock of the Day - ResMed Inc. (EXPENSIVE)

ResMed Inc (RMD) is a global leading developer, manufacturer and marketer of medical solutions in the area of sleep-disordered breathing, respiratory care, and cardiorespiratory diseases.

RMD’s FY14 results (ending 30 June, 2014) revealed a 3% increase in net revenues to $1,555.0 million from $1,514.5 million for the year ended June 30, 2013. The key driver of the increase was a surge in unit sales of RMD’s flow generators, masks and accessories (although equipoised by decline in average selling price to a slight extent). The sales were up by 2% in comparison to FY13 after excluding the impact of foreign currency changes.


Strong Financial Track Record in Dollars in Billions, except EPS (Source – Company Reports)

There were positive impacts from international currencies’ movements against the U.S. dollar on RMD’s net revenues. Net revenue in North and Latin America were down by $12.5 million or 1% due to enhanced competitive activity and decreasing average selling prices. On the other hand, net revenue in markets outside North and Latin America were up by $53.0 million or 8%. Net revenue from flow generators totaled $846.7 million (3% rise); and from masks and other accessories totaled $708.3 million (3% increase). Gross profit increased to $989.8 million from $940.7 million of FY13, i.e., up by $49.1 million or 5%, owing to cost savings from manufacturing and supply chain improvements, promising change in product mix, encouraging foreign currency impact. There was an increase in selling, general and administrative expenses owing to an increase in the number of sales and administrative personnel to support growth and other expenses. RMD reported that its combined dividend and buy-back over past 5 years is equivalent to about 103% of free cash flow.
 
The Company confirms to have a healthy historical revenue growth with operational excellence and strong cash flow. Further, it claims to have a robust capital deployment through share repurchases and dividends.

RMD operates in more than 100 countries either directly or with distribution partners. It has an integrated global manufacturing footprint with operations in Australia, France, Singapore, and USA.


Financial Highlights for Q1 2015 (Source – Company Reports)

Based on the Q1 2015 results, the Company aims to improve outcomes and reduce healthcare costs while improving quality-of-life for patients by bringing symptomatic relief. It further intends to provide solutions for preventing chronic disease progression. RMD tries to fulfill above objectives through a broad range of products & solutions which entail connected devices, home sleep testing etc.  


Diversification by Region and Product (Source – Company Reports)

The Company appears to target under penetrated global sleep disordered breathing market while managing new adjacent markets and emerging markets with the help of product innovation.


Horizons of Growth (Source – Company Reports)

The Company has a broad Air Solutions Platform. Further, products like women-specific designed masks (AirSense device), Narval CC™ (oral appliance therapy), and ApneaLink™ Air are some key tools which have helped RMD to continue growth in SDB market segments. 


Air Solutions Platform (Source – Company Reports)

Another category of solutions entail U-Sleep compliance system that improves workflow efficiency. Under RMD’s awareness initiatives, the Company has come-up with “Better Sleep for Women” education and product focused campaign, and also launched S+ sleep monitoring device, which is the world’s first non-contact sleep system available online and in retail stores.


AirFit Mask Family (Source – Company Reports)

With regards to the adjacent growth market, the Company has introduced the Astral life support ventilator, noninvasive ventilation systems, bilevel devices (such as the recent AirCurve™), and Adaptive Servo-Ventilation system.

Under the new business growth, RMD is focusing on clinical studies to demonstrate impact of adaptive servo-ventilation (ASV) on heart failure.


Research in Heart Failure (Source – Company Reports)

Q1 2015 started with a strong performance and increase in sales owing to Astral life support ventilator and other few products such as AirSense; however, it will be too early to comment on the level of returns for FY15 in view of FY14 volatility. EPS growth outlook also does not look favorable. The gross margin guidance for FY15 of 61-63% was provided, which is consistent with the previous quarter guidance. With recovery in Japan, sales under rest of the world segment also bettered. Mask sales were softer with US sales down by 1% and Rest of the World up by 2%. The recent product launches though caught grip but weaker prices led to a downturn. Sales outside the US were comparatively strong.

Also, a few risks that may be of concern include alternate therapies from competitors, price declines, market slowdown, bearing of US competitive bidding, and critical exchange rate movements.

Accordingly, we believe that the stock is EXPENSIVE at the current price of $5.87,  and we would review the same at a later date.


 
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