Specialist sleep treatment and healthcare business ResMed Inc. (CHESS) (ASX: RMD) fell heavily in April following a quarterly results release that fell short of analysts' expectations.
ResMed's shares fell 9.7% in one day and nearly 13% for the month following the March quarter results release that showed margin compression was hurting profitability. At the same time management guided to a downgrade in June quarter gross margins from 60-62% to 59-60%.
Bargain Basement?
ResMed's shares fell heavily in similar conditions in 2014 when one poor quarter of US growth resulted in a share price plunge from $6 back towards $5. If you need a sign that investors who sold out in the panic made the wrong choice, you need only look at today's share price of $8.40.
Of course, today's share price is a way from the high of $9.84 reached in April, which begs the question, should investors take the latest dip as a chance to buy a great quality company at a reasonable price?
The Concern
Investors and analysts were most concerned about the margin compression as a result of lower disposable mask sales (high margin) and greater unit sales (low margin).
The Opportunity
What some smart analysts are focussing on is that users of ResMed's previous model have upgraded to the new model, thereby boosting the number of units sold (sales increased 42% in the US, which is a lot for ResMed), but temporarily supressing the amount of masks sold as the units (presumably) come with some masks.
Analysts also point to tailwinds from a lower Australian dollar, the phased rollout of the new units prolonging higher sales volumes, and medium-term improvement in margins as mask sales start to overtake unit sales following rollout.
The Final Word
At the end of the day, ResMed posted an operating profit of US$105.9 million on revenues of US$422 million for the quarter. Revenues are expected to continue growing strongly and ResMed's new and improved unit has the ability take market share from rivals.
