Jun Bei Liu: Demand couldn't be higher for this biotech

There has been a flight to quality amid the recent market volatility, with investors scouring the market for companies with sustainable earnings. This biotech has delivered that, and then some. 

In June, Randal Jenneke from T.Rowe Price identified this company as a stock to lead the market out of bear territory, whilst it was a popular pick amongst Livewire contributors heading into reporting season.

Which stock, do you ask? California-based, Australian-listed medical device maker ResMed (ASX: RMD). The stock fell sharply in late April and bottomed out below $28 but has since rallied approximately 20% and is trading towards $34. 

ResMed’s new Airsense 11 device has been well received by patients, chip shortages crucial to product delivery have abated, and a recall from one of RMD’s competitors – which will see it out of the market until next year - has also helped.

As part of Livewire’s 2022 August Reporting Season coverage, we reached out to Jun Bei Liu from Tribeca Investment Partners to get her take on the numbers and to assess whether there is further upside on offer.

"I would buy this stock, particularly when it has a dip on a result that is very strong, and it is giving a very bullish outlook for the next 12 months as well". 

ResMed (ASX: RMD) FY22 key results

• Revenues up 12% to US$3.6 billion
• Income from operations up 6%
• Net profit up 64% to US$779.4 million
• Cash on the balance sheet down 7% to US$273.7 million
• Quarterly dividend increases 5% to US$0.44 per share
• Earnings per share of US$5.30

Note: This interview took place on Friday 12th August 2022. ResMed is not currently a top ten holding in the Tribeca Alpha Plus Fund. To learn more click here.

What were the key takeaways from the ResMed result? What surprised you the most?

The key takeaway of the result is that they came in line with expectations, particularly on the operating line - EBIT was in line with expectations. Operating profits were a little bit higher than expectations - 4% above. 

We expect an earnings upgrade in the vicinity of 2% tomorrow from analysts. 

Net-net, it’s an inline result.

What really surprised us is that US device sales have been incredibly strong. For this number, they are cycling very strong like-for-like, PCP (previous corresponding period) numbers, and most of the analysts were expecting low single digits growth in US device sales. But they actually did 11% on very, very tough comps. So, just an incredible result.

Normally investors in this company like to look for strong US sales. The rest of the world is a little bit weaker, as they are cycling some strong numbers from COVID, whilst in India they had a one-off sale. But the US more than offset that and overall sales were very good.

Gross profit was okay. It's in line with the expectations and cash flow was just a tad weaker. It's mainly because they do need to build some inventory – the demand has been so strong they're just selling everything they build. They had to build a little bit of inventory just to sell through different channels.

What was the market’s reaction to this result? Was this an overreaction, an under reaction or appropriate?

I think it's an overreaction. When the stock opened, it went down as much as 5.5% – clearly an overreaction. But we have to understand the stock has rallied extremely hard into this result, thinking it would be a great result, and it turned out to be a great result. So, there's a bit of 'buy the rumour, sell the fact' happening. It has since recovered from being down 5.5%. If we see a positive session in the US tonight or tomorrow night, the US listing will start to rally because of the strong results.

Would you buy, hold or sell ResMed on the back of these results?

I would buy this stock, particularly when it has a dip on a result that is very strong, and it is giving a very bullish outlook for the next 12 months as well.

What’s your outlook on ResMed and the healthcare sector over FY23?

My outlook for the healthcare sector is very positive, simply because it is a sector that is very defensive and it offers structural growth. Some names have been hurt by COVID and earnings should catch up quite quickly. Earnings will not be hurt by any economic uncertainty and that positions the sector very well in people’s portfolios.

In terms of ResMed, we think the outlook is very bullish. 

They gave an outlook on their earnings call. They talked about increasing production quarter on quarter and that's very strong. They're selling everything they can make and the more they can make, the more they can sell because Philips, their major competitor, is still out of the market. And they believe that Philips won't come back into the market for at least another 12 months. That is really good for ResMed. Add into the mix their strong pricing power and they can more than offset all the inflation that is coming through.

Are there any risks to this company and its sector that investors should be aware of given the current market environment?

I think there is opportunity in this sector as opposed to risk. given the current market macro condition. There's a lot of uncertainties in the market and we don't know how far inflation will go. We don't know how much interest rates will go up. We can guess, but ultimately it depends on how economic activity turns out.

This whole sector is very well positioned. One threat is if bond yields, which determine the valuation of growth companies, suddenly started rallying again. That would put pressure on valuations. But for long-term investors, these are great companies to hold in the portfolio.

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 on the market in general?

I'm cautiously optimistic and I think the market is probably somewhere near three, but it's sector by sector. Some sectors have rallied very hard in the last couple of months, and some of the cyclical sectors are looking pretty cheap because they've been sold off leading up to what should be a good result season. Net-net, the market is in neutral territory. It's on 18 times earnings and historically that’s about average. 

Catch all of our August 2022 Reporting Season coverage

The Livewire Team is working with our contributors to provide coverage of a selection of stocks this reporting season. You can access all of our reporting season content by clicking here.