Resmed sleeping on the job

It could get tough out there for the health services giant.

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Despite investors doing their best to push Resmed (ASX: RMD) back over $5, the global innovator of respiratory products, used to treat sleep apnea, looks to be having a quiet doze.

While Resmed has had a stunning run in returning value over the past year, coming off a $2.93 low a year ago and up almost 26% on the year to date — and has been expected to benefit greatly from the falling Australia dollar — its share price has been rather prostrate the past couple of months, when the market has been recovering.

From an all-time high of $5.28 on May 29 it’s been struggling to stay above $5 since, falling to $4.84 last Thursday, after Goldman Sachs had downgraded it from buy to neutral. It was trading down 0.6% to $4.93 mid-session Tuesday in a market up by about the same margin.

Despite being seen as defensive stock and one that can help preserve capital in a volatile market, Resmed is going to have to show it can preserve margins among increasing cost pressures, keep dominant market share in the face of stiffer competition and stay innovative to keep its products out in front. To that end, it spent $31.2 million on R&D for the quarter ended March 31, an increase of $2.8 million.

You’d think that announcing record revenue (up 10% to $383.6 million) and net income (up 31% to $84.9 million) for the same quarter would mean Resmed is in a rather unassailable position. But Goldman Sachs analysts said increased competition put downside risk on its revenue forecasts in both the 2013-14 and 2014-15 financial years. It even expected zero earnings growth in 2013-14, aside from any benefit in the falling Aussie dollar.

Morningstar has a hold recommendation on Resmed, upgraded on July 1 from reduce, but also puts its intrinsic value at $4.50.

Two bits of good news for investors in the dual-listed company is that it now pays dividends (and quarterly), and that it announced a couple of weeks ago it had won a patent dispute over sleep apnea products being distributed by a United States competitor Apex.

Even better is that one US market researcher has forecast the global sleep apnea market is expected to be worth $19.72 billion by 2017, up from an estimated $7.96 billion in 2011.

Foolish takeaway

It could get tough out there for the Australian market leader, but it’s an extremely well-run, solid company too. Major pullbacks may present a buying opportunity, but Resmed is probably still pricey at current levels.

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Motley Fool contributor Andrew Ballard does not own shares in Resmed. 

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