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Here’s why ResMed Inc. (CHESS) is one stock that will have you sleeping soundly

The healthcare sector was one of the best performing sectors on the Australian stock exchange last financial year. Investors have been drawn to the sector over the past few years for one main reason: it’s considered a ‘defensive’ sector. These are the kinds of companies that provide products and services people will need no matter what the economic environment. Think food, utilities and healthcare.

Enter ResMed Inc. (CHESS) (ASX: RMD). It’s a major supplier of medical equipment to treat obstructive sleep apnea. The condition impacts many people, and the potential market for the company seems to be growing. In fact according to The New England Journal of Medicine, as many as 9% of middle-aged women and 24% of middle-aged men are still undiagnosed and untreated.

A clear growth strategy

Home sleep testing has become an important development for the medical equipment provider. Physicians can now send patients home with the necessary equipment to achieve a diagnosis. The potential for increased awareness among patients is a key pillar in the company’s growth strategy.

ResMed is also looking at other growth options. It’s pushing further geographically, and importantly is also exploring new clinical applications for its breathing devices. For instance, it has recently highlighted the connection between sleep apnea and hypertension.

Just this month, the company announced a program that seeks to empower women to work with their physicians to figure out when poor quality sleep is the cause of a health issue as opposed to a symptom. It’s clear the company is going to use community engagement and education to push further into its market.

Analysts have raised concerns about the potential for lost income as the U.S. government withdraws some of its Medicare support as a result of the new “Competitive Bidding” rules. ResMed has assured investors that the overall costs associated with this government pullback are being managed.

The numbers make sense

ResMed produced a net profit margin of over 20% last financial year. Revenues were essentially flat but the firm was effective in bringing costs down.

The company’s earnings per share are forecast to rise steadily in coming years, from 14 cents per share to around 31 cents per share, and its dividend — currently yielding around 2% — is forecast to rise over the next couple of years. From a solvency point of view, the company is also quite sound.

Added bonus

ResMed will certainly welcome a falling Australian dollar. Currently, forecasts for the dollar range anywhere between 75 U.S. cents and 90 U.S. cents. Given ResMed earns the majority of its revenue from the U.S., a rise in the U.S. dollar compared to the Aussie dollar should lift its financial performance.

ResMed won’t make you rich overnight but it is a bright spot in a sector that will continue to benefit from risk aversion in the share market. ResMed’s also leveraged to a product that should see more usage following increased awareness about sleep disorders in the community.

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Motley Fool contributor David Taylor does not own shares in any of the companies mentioned in this article.

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