ResMed's latest earnings are "super impressive", says this fund manager

Although it's been US-based for many decades, we can still count ResMed (ASX: RMD) as a great Australian success story. The company, which provides devices for the treatment of sleep apnoea and chronic obstructive pulmonary disease, has benefitted from the ongoing effects of a product recall affecting its major competitor (Philips).

During the COVID-19 pandemic, it also produced ventilators and bilateral devices to help sufferers cope with its long-term effects. 

In 2023, ResMed shares were among the market's hardest hit as investors piled into GLP-1 drug manufacturers like Eli Lilly and Novo Nordisk. And although shares fell 35% from peak-to-trough, it became apparent that those who seek these weight-loss drugs also tend to have sleep apnoea and need ongoing treatment from ResMed's products. 

Since this bottoming out, ResMed shares have soared and never looked back. Will its Q2 results push the stock even higher? 

To find out, I sat down with Luke Laretive of Seneca Financial Solutions to discuss RMD's earnings announcement today and the outlook for the company.

ResMed Q2 results

• Revenue of $1.28 billion vs $1.27 billion est.
• Operating income of $435.9 million vs $424 million
• EPS of $2.43/share vs $2.30 est. 
• Earnings guidance:
• Gross margin: 59% - 60% in H2 FY 2025
• SG&A expenses as a percentage of revenue: 18% - 20% in H2 FY 2025
• R&D expenses as a percentage of revenue: 6% - 7% in H2 FY 2025
• Effective tax rate: 19% - 21% for FY 2025
• Share buybacks: $75 million per quarter in FY 2025

Analyst estimates and some information provided by FactSet. The author owns ResMed shares.

ResMed share price over the last 12 months

What was the key takeaway from this result in one sentence?

Strong profit growth despite the negative media narrative. The cold hard facts are super impressive.

Were there any surprises in this result that you think investors need to be aware of?

ResMed beat market expectations, with earnings per share of $2.43, beating consensus of $2.30 by 6%. Beneath the surface of its impressive revenue growth of +10% was the quality of this revenue growth.

230bps gross margin expansion to 59%: Chip shortages, cost component inflation returned to normal levels while improved revenue mix (masks, software, consumables are all higher margin products, relative to devices) helped the top line.

But device sales increasing 12% was the highlight for us. This provides a growing installed base for ResMed devices on which they can sell more, high margin items to into the future – provides investors with excellent visibility on future revenue growth potential. 60% gross margins very achievable in our view. 

Would you buy, hold or sell ResMed off the back of this result?

We think ResMed is a buy, and we own the stock in the Seneca Australian Shares SMA. The share price reaction was modestly positive, but surprisingly muted in our view, considering the result was ahead of analyst estimates who have share price targets of $45 to $50.

ResMed maintains its dominant, market-leading position in the growing yet significantly under-penetrated sleep apnoea market. The company is an innovation machine, reinvesting 6-7% of its circa US$5 billion annual revenue (US$300M-US$350 million) into R&D, driving continuous product advancements. Meanwhile, Philips remains hampered by ongoing product recalls, further solidifying ResMed’s global leadership and competitive edge.

The company is positioned on the right side of innovation and major megatrends. The widespread adoption of smartwatches and sleep trackers— not just Apple & Samsung, but the likes of Oura Ring, Garmin and Whoop!. Sleep monitoring and awareness has become a main stream staple of health and wellbeing.

This shift is expected to create a long-term step change in demand generation for ResMed, particularly through the 'gamification' of healthcare, which encourages sustained engagement and better health outcomes for sleep apnoea sufferers.

Are there any risks investors need to be aware of?

Let's address the elephant in the room: GLP-1 weight-loss drugs, such as Ozempic and Wegovy. The meteoric rise in popularity of weight-loss drugs has raised concerns about their potential impact on the total addressable market (TAM) for sleep apnoea, which ResMed estimates at approximately 1 billion people globally.

However, as ResMed’s financial results continue to demonstrate, market penetration—not total market size—is the key driver of earnings growth.

Despite the vast number of individuals affected by sleep apnoea, penetration remains relatively low, with ResMed currently serving around 23 million active patients. This underscores a significant runway for expansion, regardless of any marginal reductions in the overall sleep apnoea population due to GLP-1 adoption.

Moreover, GLP-1 drugs could act as a net positive for ResMed by accelerating diagnosis rates. CEO Mick Farrell has emphasised that drugs like Ozempic and Wegovy are increasing patient engagement with healthcare providers, facilitating the identification of conditions like sleep apnoea that might have otherwise gone undiagnosed. 

In this way, rather than shrinking ResMed’s opportunity, GLP-1 drugs could serve as a catalyst for growth, broadening the pool of diagnosed patients who ultimately require treatment solutions.

The decline and recovery of the RMD share price is an excellent example of how a prevailing and seemingly obvious narrative, is not supported by actual data and this mis-pricing creates investment opportunities.  

From 1 to 5, where 1 is cheap and 5 is expensive, how much value do you see in ResMed shares?

Rating: 2

Although RMD has re-rated from its share price low of around $21.50 in October 2023, it has only just surpassed its all-time high of $40.17 achieved in September 2021. This is despite the fact that earnings have grown at 27% (cumulative) during that time.

Today, RMD trades on 25.4x P/E, an 11.5% discount to its long term average of 28.7x. We think this is far too cheap for a company of this quality and with this sort of forward runway for growth and margin expansion.

We don't see why RMD can't trade on 30x earnings and, paired with earnings growth of 15-20% per annum, we think RMD is worth around $60.00 per share in the medium term.