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UBS & Macquarie deliver ratings on ResMed Inc. ahead of profit report

Brokers are cautious on medical device group, ResMed Inc. (CHESS) (ASX: RMD), ahead of the group’s 3Q18 results Friday due to the stock’s current valuation levels. 

UBS cut its rating to “Neutral” from “Buy” due to ResMed’s recent share price performance, following around a 15% gain in the medical device group’s shares over the past six months. 

“… With the stock trading at an EV/EBITDA premium to market of 76% (vs two-year historic average of 50%) we believe the robust earnings growth outlook is largely captured in the share price,” it said in a research note. 

“RMD is trading on 29x 12-month forward consensus EPS (FactSet) representing an 86% premium to the ASX200 industrials average. This compares to two-year averages of 24x and 54% respectively”. 

The broker also revised up its EPS forecasts by 7%, 3% and 1% over FY18E, FY19E and FY20E, respectively. It also lifted its share price target to US$104 from US$96 due to a move to a DCF-based valuation methodology. 

Macquarie meanwhile, kept its “Underperform” rating on the stock, with ResMed’s relative valuation to Australian healthcare peers one reason for the cautious tone. 

“Current valuations for RMD appear fair relative to domestic healthcare peers on a consensus PE/growth basis but slightly expensive based on Macquarie forecasts,” the broker said in a research note. 

It added that compared to both Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL), ResMed’s “re-rating has been more substantial.” 

The broker has ResMed on a current two-year P/E relative of 18% compared to Cochlear on 13% and CSL on 10%. 

Macquarie added that ResMed’s risk/reward profile was skewed to the downside, with its DCF valuation on a price scenario implying 19% downside to the current share price. 

“With scenario analysis showing the risk/reward profile as skewed to the downside as well as noting limited appeal on a PE/growth basis, we see these factors as supportive of our investment rating,” it said. 

For Friday 3Q18 result, Macquarie is looking for growth in ResMed’s masks and accessories as well as underlying trends in gross margins and any changes to expectations for the effective tax rate in FY19. It is forecasting 3Q18 non-GAAP NPAT of US$124 million. 

As at lunchtime Tuesday, ResMed’s Australian shares were down 0.2% to $12.80, while Cochlear gained 1.7% to $185.67 and CSL was up 1.2% to $161.43.   

Broader Australian healthcare stocks also gained, with Primary Health Care Limited (ASX: PRY) up 0.8% to $3.76, Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) up 0.9% to $63.25, Sonic Healthcare Limited (ASX: SHL) up 1.2% to $23.35 and Healthscope Ltd (ASX: HSO) up 0.3% to $2.04. 

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