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Is ResMed Inc a blue-chip share of tomorrow?

Sleep and respiratory healthcare business ResMed Inc. (CHESS) (ASX: RMD) posted an adjusted profit of US$132.5 million on revenues of US$591.6 million for the quarter ending March 31 2018 this morning. The profit and revenues are up 32% and 15% respectively, with the group’s operating leverage boosting the bottom line as revenue outpaces cost growth thanks in part to the group’s shift into the software-as-service (SaaS) and online health monitoring space.

The bad news was the revelation that ResMed is locked in a fight with the Australian Tax Office over a demand for US$151.7 million in unpaid taxes between 2009 and 2013. The company has already agreed to pay US$75.9 million, but will fight the demand for the balance on the basis that it is not legally obliged to make further payments.

Investors have shrugged off news over the tax bill to send the stock 3% higher today to a record $13.07 on the back of the strong operating performance as the group is growing at strong double-digit rates across the U.S., Europe and Asia.

“Our cloud-connected medical device strategy is succeeding; the major markets for our sleep business are adopting our remote monitoring systems, which plays to the strength of our offerings. Our mask business performed well across all markets, and our cloud-based, software-as-a-service business also grew rapidly in Q3,” said ResMed CEO Mick Farrell.

ResMed’s strategic shift into the SaaS space is paying off as it works to grow its recurring revenue streams, while boasting that more online monitoring of patient compliance actually saves public healthcare costs by keeping patients out of hospital.

In today’s investing world subscription or recurring revenues are the Holy Grail for investors such as those earned by Netflix, iTunes, Spotify and Amazon Prime, or more conventional SaaS businesses such as XERO Limited (ASX: XRO) and Altium Limited (ASX: ALU).

For a business like ResMed selling more medical devices everyday is an uphill task, compared to sitting back and letting subscription revenues roll in after signing up a single client potentially indefinitely. This explains management’s nascent shift into the subscription services space.

Cochlear Limited (ASX: COH) is another medical device business attempting to move into the online medical services space to profit from this attractive business model.

ResMed continues to invest around 7 per cent of revenues annually into research and development as remaining a market leader is crucial in the medical device space in order to protect margins and command premium prices.

The group will pay a US 35 cents per share dividend that Australian investors will receive on a 1-for-10 FX-adjusted basis. In other words Aussie investors are likely to receive a dividend around A$3.2 cents per share.

The US scrip sells for around 25x annualised earnings per share of US$3.92 based on its last US$97.20 closing price.

The ASX-scrip trades on a 1-for-10 FX-adjusted basis and changes hands on a similar multiple, while naturally moving in line with the USD/AUD spot exchange rate. For example if the US scrip sold for US$100 and the Australian dollar sunk to only buy US 50 cents the ASX scrip would be worth $20.

Outlook

ResMed continues to tick the boxes as innovative growth business able to invest for the future while rewarding shareholders with a steady stream of quarterly dividends and share buybacks. The stock is up around 180% (plus dividends) over the past five years and its investments in technology mean it can take healthcare from the hospital to the home in search of growing profits.

What I like most of all about this business though is that it seems to retain a genuinely long growth runway in large addressable markets.

Of course just about every company on the stock market will claim that it has a huge global market opportunity, but very few genuinely do, with potential to capitalise on it. However, ResMed looks the real deal on this front, with the one problem for investors being its valuation. For now I would rate the stock a hold, although I’d be happy to buy the stock 5 per cent cheaper or so.

ResMed now has a market cap more than $18 billion and could be a blue-chip of tomorrow, but it’s not the only one….

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Motley Fool contributor Tom Richardson owns shares of Altium, Cochlear Ltd., ResMed Inc., and Xero.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Altium and Xero. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. 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 Scott Phillips.

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