You’ll Sleep Better with ResMed in Your Portfolio
It’s rare to find a stock that offers a great balance sheet, steady, predictable long-term earnings growth and demographics that promise even better for the future.
The world is dangerous and unsettling these days causing more and more people to have trouble sleeping. Increased levels of obesity add to this problem by contributing to the already high rate of Sleep Disordered Breathing (SDB) due to nighttime airway obstruction (sleep apnea).
Sleep Science has become a new medical specialty and the treatment and equipment involved has evolved by leaps and bounds over the past 10 - 20 years. There is a proven high correlation between SDB and other health problems such as diabetes, heart disease, chronic obstructive pulmonary disease (COPD) etc.
Insurance companies are now willingly paying for sleep studies and the treatments recommended afterwards as cost saving measures for the prevention of other more serious illnesses.
Most of the big players in this field are owned by large conglomerates where their impact is diluted by the small relative size of this division compared with the parent company’s total revenues. The largest competitor is the Respironics division of Philips Electronics {NYSE:PHG}.
ResMed was founded in Australia and still performs most of its R&D and manufacturing there. They sell into 70 countries worldwide with about 50% of their sales coming from non-US sources. RMD has become known as the ‘Gold Standard’ in sleep apnea hardware due to their advanced features, superior comfort and patient acceptance. Their services include one-on-one patient consultations to ensure proper equipment selection, fit and usage instruction which are critical factors in the success of the therapy.
How has RMD performed over the long-term? Decide for yourself. Here are their per share numbers (from continuing operations) as reported by Value Line.
ResMed’s FYs end on June 30 of the same year so FY 2011 is due to finish this week at all-time record levels in every category. In fact, the consensus estimate is now one penny above Value Line’s last estimate.
The 10-year growth rates are shown below:
Per Share (Split Adjusted) | FY 2001 | FY 2011* | Percentage Increase |
Sales | $1.23 | $8.15 | 562.6% |
Cash Flow | $0.29 | $1.95 | 572.4% |
Earnings | $0.22 | $1.45 | 559.1% |
Book Value | $0.80 | $9.75 | 1118.7% |
* FY 2011 data includes Q4 estimates |
Growth like that wouldn’t be expected to go unrewarded. RMD commanded an average P/E of 30.4x in the decade just completed. That includes the booming early decade market years when the multiple was 40+ and also the depressed valuation years of 2008 – 2009 when RMD traded for just 20 – 22x current earnings.
Despite its stellar results ResMed shares have not quite stayed level over the past 12 months…
That puts their shares at about 20.7x trailing and under 19x the estimate for the FY starting this Friday. That’s the lowest absolute valuation for RMD since 1997. Even at the exact panic low in 2008 these shares bottomed at $14.50 on trailing EPS of $0.74 – a P/E of 19.6x. Buyers in late 2008 saw RMD surge by 147% (from $14.50 to $35.90) over the next 18 months.
As of March 31, 2011 ResMed had only $80.2 million in total debt against over $671 million in treasury cash. They have no defined benefit plan to worry about. Value Line gives them superior grades for financial strength, stock price stability and earnings predictability while noting that RMD shares have outperformed 85% of their 1700 stock universe over the last 10 years.
Standard and Poors also has favorable comments on RMD. They assign them 4-Stars (out of 5) and carry a conservative 12-month target price of $36 which would provide a nice 19.8% gain from last week’s closing quote. That goal could easily be exceeded as RMD shares touched a high of $35.90 in early 2010 when trailing EPS were $1.19 or 33% below forward expectations.
ResMed’s one-year share price lag has created a nice buying opportunity for value oriented investors with a reasonable time horizon. Demographic changes should only help their business. The present valuation is the lowest in many years and might even serve to attract a takeover bid from a larger company in search of a growth component.
My minimum goal would be about 20% over a one-year time period and much more than that for those willing to let things play out over a longer horizon. Risk appears lower than average while RMD’s upside seems to be well defined.
You might want to sleep on it before plunging in.
Disclosure: Long RMD shares and short RMD puts
