Monday saw sleep and respiratory healthcare business ResMed Inc. (CHESS) (ASX: RMD) return some of Friday's 3% gain following a solid 3Q 2018 result, but is now a good time to sell the stock?
While ResMed shares have gained around 12.5% over the past six months, the stock still looks relatively good value compared to listed medical device peers, Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL).
ResMed is trading on a P/E ratio of 31.2 times, according to Reuters estimates, compared to Cochlear's 48.6 times and CSL's 36.2 times.
It also posted a 3Q 2018 result that was above consensus estimates, with a 32% increase in adjusted profit to US$132.5 million and a 15% increase in revenues of US$591.6 million.
The key factors to consider are whether ResMed can sustain this solid earnings growth following a good 3Q earnings result and whether future earnings growth is already priced into the stock at current levels.
Brokers are somewhat divided on the issue. Some note that while ResMed is trading at a discount to the likes of Cochlear and CSL, it is still trading at a premium to its historical average and the wider ASX/S&P 200 index.
Those more cautious in the market also see risks to the medical devices group's growth outlook given competition in the sleep apnoea mask sector.
Citigroup is one broker in this camp, and says ResMed's current valuation "fairly reflects sustainable top line growth prospects and potential for operating leverage".
The broker also sees risks to ResMed's growth prospects due to the likely launch of new sleep apnoea masks by competitors, noting this increases "the risk that RMD's will not outpace market growth through FY19 in the high margin masks segment".
However, others are more bullish, especially on the sustainability of earnings growth going forward. Morgans is one broker expecting a solid earnings trajectory due to "continued efficiency gains and product development initiatives".
"Notably, operating leverage continues to improve, which we view as sustainable on the back of stable pricing, further traction in telemonitoring, a "full"mask pipeline and numerous other product development initiatives," it said in a report.
It also believes that the stock should trade at a premium to the broader healthcare market given this strong sustainable profit growth. It maintains an "Add" rating on the stock.
Morgan Stanley is similarly positive and sees ResMed's robust top-line growth continuing due to factors such as a more stable US reimbursement environment for ResMed. The broker also prefers ResMed due to its lower P/E as compared to Cochlear and CSL.
