Shares in sleep apnea device maker ResMed Inc. (CHESS) (ASX: RMD) rose 14% between Tuesday April 15 and Monday’s close, smashing the 2% return from the ASX 200 over the same period.
So what happened?
Put simply, investors appear to have decided that the major question mark hovering over the company’s future performance won’t be so much of an issue after all. Towards the end of April, ResMed reported its financial results for the quarter ended 31 March; a respectable 4% increase in revenue, and a 6% rise in net income. The result was better than the previous quarter’s 2% rise in revenue which had compounded some investors’ worries about the future.
Analysts were concerned that ResMed would struggle to grow revenue in coming years due to the new competitive bidding process in the US that aims to reduce the medical costs. Lower revenue growth was seen as a precursor to what to expect in the future under the new rules. The latest result, and some upbeat commentary appears to have calmed the fears of most.
What happened to ResMed’s share price over the past six months is a perfect example of short-term market ‘noise’. You’ll note that ResMed’s share price is now above where it was in January, and rising back towards the high it hit in October 2013. These short term fluctuations in the share price offer a buying opportunity for astute investors, however unfortunately this time I didn’t follow my own advice and missed out on the mid-April low.
Still time to buy?
I believe there is. ResMed is a company that always seems expensive, and yet with the incredible record of increasing revenue every quarter since listing in 1995, its current PE ratio of 21 doesn’t seem all that demanding. Some analysts are noting that sales growth in the most recent quarter was a result of discounting, which could reduce future demand, however it’s far too early to make a call on this and the majority of brokers rate the company as either a ‘buy’ or ‘hold’.
ResMed’s share price fall between October 2013 and April 2014 is a classic example of market noise. The best investors use pullbacks like we’ve just seen as a time to add to positions in order to take full advantage of future growth.