For the record, I already owned a decent chunk of ResMed Inc. (CHESS) (ASX: RMD) shares…
…but last week I doubled down on my holding in the biotechnology giant.
Who is ResMed Inc.?
ResMed, as its name might suggest, has its shares dual-listed on both Australian and US share exchanges. It's the leading biotechnology company specialising in the development of devices for sleep apnoea and related respiratory disorders.
The $US7.2 billion ResMed generates a very large portion (over 50%) of its revenue in North and Latin America; hence it reports in US dollars.
The rise of the US dollar will be a boon for Australian investors who receive the company's quarterly dividend payments.
However, since it does generate 43% of revenues outside the US, its headline sales figures may come under pressure in the short-term. This could amplify the price differential between its ASX-listed and NYSE-listed shares.
I expect the company's gross profit margin to fall in coming years, reflecting a lower margin product mix and currency movements. However, since the group manufactures its products in Singapore and Malaysia, the falling gross margin will be somewhat offset, since operating costs should fall.
Still, the long-term outlook is very positive for ResMed, with the company investing heavily in research and development (around 7.5% of sales revenue) against a backdrop of an aging population and rising prosperity.
Is it a value investment?
Based on my estimates of modest sales revenue growth in the US business – with a decline in sales revenue elsewhere over the next two years – coupled with a falling profit margin and USDAUD exchange rate of $1.40, I believe ResMed shares trade below intrinsic value.
While the company's shares will remain volatile in the near term, I'm a happy buyer of ResMed shares at today price of around $7. The 2.2% dividend yield is icing on the cake!
