ResMed: Solid Execution, Pricey Valuation

seekingalpha03:19

ResMed Inc., a leader in sleep apnea and respiratory care, posted strong 1Q2025 results late in October.The stock is also up nearly 45% year to date and the analyst community has become quite mixed on...

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Martin Barraud/OJO Images via Getty Images  Today, we are putting ResMed Inc. (NYSE:RMD) in the spotlight. The company is unique in the medical device space, as it operates out of two main business divisions: Sleep and Respiratory Care, and Software as a Service. Of note, in September, ResMed changed the name of these business segments to Sleep and Breathing Health and Residential Care Software. The company is doing something right based on how shareholders have been rewarded year to date.   Seeking Alpha ResMed is headquartered in San Diego, CA. The company manufactures and markets numerous devices for sleep clinics, home healthcare dealers, and hospitals. ResMed has a network of distributors and direct sales force and offers products like AirView. This is a cloud-based system that enables remote monitoring and changing of patients' device settings. ResMed is quite focused on servicing the sleep apnea sector.   October 2024 Company Presentation The stock currently trades just above $245.00 a share and sports an approximate market capitalization of $36 billion. The company operates on a fiscal year that begins on July 1st, it should be noted. Therefore, ResMed is currently in its FY2025. Below is how the company's revenues currently break down between products and services, as well as by geographic region.   October 2024 Company Presentation Recent Results: The company posted its 1Q2025 numbers on October 24th. ResMed delivered a non-GAAP profit of $2.20 a share, 16 cents a share above the consensus. GAAP earnings came in at $2.11 a share. Earnings were up 27% year-over-year on a non-GAAP basis. ResMed also produced $326 million in operating cash flow in the quarter. Gross margins also improved by 420bps from the same period a year ago to 58.6%.   October 2024 Company Presentation Revenues grew 10.9% on a year-over-year basis to $1.22 billion, besting expectations by some $40 million. Both the U.S. and non-U.S. businesses had the same approximate sales growth in the quarter. Residential Care Software sales rose 12% from the same period a year ago. Analyst Commentary & Balance Sheet: The analyst community is currently mixed on the prospects for the stock, mainly due to valuation. Since first quarter results were posted, four analyst firms, including Bank of America and JPMorgan have reiterated Buy ratings on the stock. Price targets proffered range from $270 to $283 a share. Oppenheimer, RBC Capital ($232 price target), Jefferies ($245), and Needham all chose to maintain Hold ratings on the equity. Of note, Wolfe Research downgraded RMD in mid-September on the potential threat from Eli Lilly and Company's (LLY) Zepbound and potentially other GLP-1 drugs in the sleep apnea space and stated the stock was more deserving of a 20 P/E ratio. Just over five percent of the outstanding float in the shares are currently held short. Numerous insiders have been frequent and consistent sellers of the stock throughout 2024. So far in November, they have disposed of more than $4.5 million worth of the shares collectively. ResMed ended the third quarter with a bit over $425 million worth of cash and marketable securities against just over $675 million of long-term debt.   October 2024 Company Presentation Conclusion: ResMed made $7.72 a share (Non-GAAP) in FY2024 on $4.69 billion worth of revenues. The current analyst firm consensus has profits increasing to $9.39 a share in FY2025 as sales climb to $5.12 billion. They project earnings of $10.28 a share in FY2026 on seven percent sales growth. The stock trades for nearly 32 times trailing earnings and sports a dividend yield of just under one percent. This is a premium to the S&P 500, which itself is extremely valued, putting it in a historical context around the index's price-to-earnings ratio.   Historical S&P 500 P/E Ratio (Multpl) RMD also trades at nearly 7.7 times trailing revenues. While this is lower than the stock has traded for at times over the past couple of years, it is significantly above where the stock was typically valued in the pre-COVID years, it should be noted.   RMD Historical Price to Sales Ratio (MacroTrends ) ResMed is a solid company that should increase earnings at a 15% CAGR over FY2025 and FY2026 based on current projections. It is the undisputed leader in its niche of the market. The company recently revealed its 2030 Strategy, which aims for annual sales growth in the high single digits, with earnings growth higher than revenue growth.   October 2024 Company Presentation  However, based on its current valuation, RMD is trading at north of a 2 PEG ratio with both revenue and earnings growth projected to slow somewhat in FY2026. Using the operational cash flow run rate of the first quarter of its FY2025, the stock currently has an operational free cash flow yield of approximately 3.6% which is less than the current yield on the “risk-free” 10-Year Treasury (US10Y). Therefore, RMD, after a nearly 45% rally here in 2024, is just a bit too pricey for my taste at current trading levels.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2486059068"}