Better Buy: Fisher & Paykel Healthcare Corp Ltd vs. ResMed Inc. (CHESS)?

Credit: Unsplash

According to the American Academy of Sleep Medicine, undiagnosed obstructive sleep apnoea (OSA) is costing the United States economy nearly US$150 billion per year through lost productivity, motor vehicle accidents and increased health care costs as a result of treating related co-morbidities.

Around 30 million Americans, or 12% of the adult population, are thought to suffer from some degree of sleep related disturbance and the prevalence of this is rising. Unfortunately, many other populations in the developed world, including Australia, also have a high incidence of OSA as a result of poor lifestyle factors and obesity.

The good news for Australian investors is there are two high-quality companies on the ASX that operate exclusively in this segment of the healthcare market that are aiming to improve patient outcomes, and at the same time, deliver great shareholder returns by taking advantage of this huge global opportunity.

As highlighted by the chart below, Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) and ResMed Inc. (CHESS) (ASX: RMD) have both been outstanding performers over the past five years and have comfortably outperformed the broader market.

Source: Google Finance

Source: Google Finance

Nonetheless, both shares have recently pulled back quite sharply from their recent 52-week highs, which means now is a great time to take a closer look at both companies.

To help investors get a brief overview of both companies, I have highlighted some important comparables in the tables below (figures sourced from CommSec and company reports):

Company Market Cap. Current P/E Ratio Forward P/E Ratio PEG Ratio Forecast EPS Growth (FY17 vs FY16) Dividend Yield
 Fisher & Paykel  $4.4b 32.1  27.8  1.31 25.2%  2.2% unfranked
 ResMed  $11.7b 24.4 21.1 1.73 15.2% 2.4% unfranked
Company Debt to equity Ratio Cash Balance Gross Margin R&D as % of Revenue Return on Equity Discount to 52-week High 10-Yr Total Shareholder Return
 Fisher & Paykel  11.7%  $17.2m  64.9% 9.8%  26.4%  23.4%  11.6%
 ResMed  69% $984m  58.9% 7.4% 21.2% 10.7% 10.8%

Based on the information above, there isn’t a clear standout winner in my mind.

Fisher & Paykel is trading on a higher earnings multiple, but this is offset by a lower price-to-earnings growth (PEG) ratio as the company is expected to grow more strongly over the next year or so.

Both companies are financially strong, generating returns on equity above 20% and both enjoy extremely strong gross profit margins between 59%-65%.

Fisher & Paykel and ResMed also have geographically diverse operations, although ResMed has a significantly larger footprint in the North American market.

Importantly, both companies are spending a good chunk of their revenue on research and development (R&D) and this should ensure new products will be developed that can enhance patient compliance and profits.

Foolish takeaway

I don’t think investors necessarily need to select one company over another in this situation.

Both Fisher & Paykel and ResMed are high quality companies that are very well placed to take advantage of a huge global opportunity.

As a result, I would happily add either share to my portfolio on the expectation that both will deliver above average returns over the next decade.

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Motley Fool contributor Christopher Georges owns shares of Fisher & Paykel Healthcare Limited and ResMed Inc. 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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