Resmed Inc (ASX: RMD) reported Q3 earnings overnight, on Thursday 25 April, sending RMD shares in its US up +11% after-hours.
ResMed’s 3Q24 gave investors an update on the health of the business and suggests profit for the full year FY2024 is likely to beat consensus expectations.
Resmed results
Resmed reported net profit up +29% to US$300.5 million, on sales +7% to US$1.2 billion. The result beat earnings expectations by 9%, with RMD shares responding positively.
ResMed is a world leader in devices and technology for the treatment of sleep apnea. It sells sleep apnea devices, consumables (masks), and software to customers all around the world. Thanks to this ‘razor and blades’ business model, Resmed generates 20% return on invested capital (ROIC), a key metric for future shareholder returns.
Gross margins climbed by 260bps to 57.9%, thanks to double-digit mask and accessory growth (higher margin, recurring revenues). Gross margins have been a key area of focus for the share market analyst community, with margin compression thanks to chip shortages, freight, FX headwinds and labour costs experienced last year being a contributor to underperformance.
Another highlight of the result was operating cashflow of $402m, enabling debt repayments of $220m and a dividend of 4.8 US cents per share (RMD shares typically pay unfranked dividends each quarter).
Outlook positive despite initial fears from weight loss drug narrative
The RMD Share price came under pressure in 2023 amid fears that GLP-1 weight loss drugs such as Ozempic, Wegovy, Mounjaro from the likes of global pharmaceutical giants Novo Nordisk A/S (CPH: NOVO-B) and Eli Lilly And Co (NYSE: LLY) would reduce the requirement for CPAP machines due to obesity’s correlation with sleep apnea.
We outlined why we thought these fears were overplayed for Rask in August 2023, a few weeks before the ultimate share price low.
In reality, the company has reiterated that reiterated its expectations that GLP-1s will be a tailwind for its sleep business as people prescribed weight loss drugs are often also recommended Resmed CPAP machines to help with sleep apnea. This helps Resmed fill up the customer funnel in what is an underpenetrated sleep apnea market.
We see the positive long term outlook for Resmed as intact for 2 reasons:
- The market is underpenetrated and growing. Resmed believes sleep apnea affects an addressable market of ~2 billion people globally. On that basis, the market for Resmed’s CPAP devices and associated is only <20% penetrated, with plenty of room for growth.
- Resmed is taking market share. Ever since Philips’ disastrous product recall in 2021 of 15 million devices (and many more impacted by the reputational damage that was caused by patients potentially being exposed to toxic materials), Resmed has emerged as the clear market leading solution for patients. As we saw with Cochlear Ltd (ASX: COH)’s product recall, these issues take years to recover from (people don’t take risks with their health).
Are Resmed (RMD) shares a buy today?
Resmed’s valuation of 22x forward P/E is modest (historical average 28x) given the quality of the business and growth prospects. Resmed has delivered revenue growth of >8% in each of the last 8 years. We continue to see RMD as a hold.
Resmed has been a key active overweight position in the Seneca Australian Shares SMA. RMD shares have outperformed the S&P/ASX 200 (INDEXASX: XJO) index by +22% since its low in September 2023. If you’re interested in hearing more about our 5 largest overweight high conviction ASX shares, schedule a call with Luke today.
