Why the ResMed Inc (CHESS) share price is tumbling today

Credit: PressReleaseFinder

Shares in sleep treatment specialist ResMed Inc. (CHESS) (ASX: RMD) fell around 6% to $7.40 this morning after the company revealed a profit of US$104.3 million on revenues of US$453.9 million for the quarter ending March 31 2016.

The company declared a quarterly dividend of US3 cents per share.

Once again the standout region was the Americas with revenue up 12% over the prior year’s quarter to US$282.2 million, with revenue in Europe and the rest of the world up 3% on a constant currency basis to US$171.1 million.

The company split out earnings on a non-GAAP accounting basis to deliver a profit of US$112.4 million, up 4% on the prior corresponding quarter. However, the unadjusted (GAAP) profit was flat, which is a result the company blamed on changes in product mix, average selling prices and geographic mix – all of which contributed to falling gross margins.

Large medical device retailers like ResMed or hearing aid manufacturer Cochlear Limited (ASX: COH) rely on the market-leading nature of their products to charge premium prices and grow the all-important profit margins.

Falling margins for medical device or healthcare businesses can spell trouble in the form of competitive pressures and are a traditional ‘sell signal’ for Wall Street analysts schooled to focus on this metric almost above all others.

Today’s share price falls are no big surprise therefore and seem a short-term overreaction when you consider the double-digit revenue growth posted in the US, and fact that adjusted (non-GAAP) earnings lifted 4% over the prior corresponding quarter.

ResMed also cancelled its share buyback over the period, as it needs to save cash after taking its biggest strategic gamble yet with the US$800 million acquisition of US digital healthcare giant Brightree Inc.

Part of the attraction of Brightree is likely its margin-boosting potential and how the acquisition plays out will be a key driver as to the share price’s future direction.

In my opinion today’s price falls are a mild overreaction and selling for $7.40 ResMed is good value for long-term focused investors after a slice of a globally-leading healthcare giant.

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Motley Fool contributor Tom Richardson owns shares of ResMed Inc..

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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