Shares in breathing device maker ResMed Inc. (ASX: RMD) are down nearly 9% so far in 2014, compared to a minor 0.8% increase in the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO).
In my view this weakness could be a great opportunity to buy or top up on ResMed shares which could turn out to be a long-term bargain. Here are three reasons why:
1. ResMed is still buying its own shares
Last week ResMed’s board of directors approved a new share buyback program granting the company approval to repurchase up to 20 million shares on the open market. This represents around 14% of outstanding shares and is a continuation of the company’s long-term capital management plan.
The impact of the program is to increases earnings per share, as well as the company’s share price. ResMed holds around U.S. $876 million in cash and cash equivalents and it can be an effective way to return some of that cash to shareholders.
2. It could be cheaper than its competitor
With a price-to-earnings (p/e) ratio of around 20, at a high level ResMed appears to offer better current value than Kiwi competitor, Fisher & Paykel Healthcare Limited (ASX: FPH), with a comparatively high p/e ratio of 27.
Obviously this fails to take into account expected growth and last month FPH announced an increase to expected net profit for the full year. However ResMed has grown net profit by 35% in the last three years and this is likely to continue per reason three below.
3. Long-term demographics are in its favour
A global increase in the ‘greying population’, rising obesity and increasing global healthcare spending will help to play into the hands of ResMed in the years to come.
Mick Farrell, ResMed’s chief executive officer, noted in the company’s recent quarterly update the strong prospects for growth from new product launches: “Opportunities for growth remain in sleep, respiratory care, and cardiorespiratory markets in all geographies.”
Behind ResMed’s falling price is a company with strong long-term growth prospects and a capital management plan to return value to shareholders. If revenue and earnings growth can continue, the current price could turn out to be a long-term bargain.
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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.