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Why the ResMed Inc. (ASX:RMD) share price just hit another record high

Shares in sleep treatment and home health monitoring specialist ResMed Inc. (ASX: RMD) printed a record high of $14.12 today as investors continue to bid the stock up in anticipation of it delivering some strong growth on the back of new product releases and the company tax cuts handed out in the U.S. by President Trump.

Surprisingly, investors have also shrugged off the Australian tax office’s (disputed) demand for $151.7 million in unpaid income taxes that the company is currently in the middle of resolving.

Australian investors in ResMed shares are actually buying chess depositary instruments (CDIs) that represent a 1/10th interest in the NYSE-listed scrip where San Diego-based ResMed retains its primary listing.

As such the weakening Australian dollar automatically elevates the value of the ASX-listed CDIs, although this is something of a double-edged sword as a stronger U.S. dollar makes ResMed’s overseas revenues less valuable given it reports in U.S. dollars.

The bottom line is that currency movements are largely irrelevant to long-term ResMed investors who should be focused on the company’s new product development and shift into the digital health space powered by the lucrative software-as-a-service (Saa) business model.

ResMed like other global-market-leading medical device makers enjoys strong underlying demand for its products, with profit margins remaining critical to the health of shareholder returns.

Rising margins show product strength and competitive advantages that tend to equal a buy signal for Wall Street analysts when combined with the consistent revenue rises of market-leading medical device businesses. Whereas falling margins spell trouble; competitive heat, downsizing, and potential share price falls ahead.

ResMed has successfully maintained gross profit margins over many years despite its competition and the market has responded by bidding up the stock up, with the reduction in the US corporate tax rate from 35% to 21% the cherry on top of the cake.

Management has also openly admitted that the shift into the SaaS space is partly designed to lift margins, but also to build recurring revenue streams as a larger percentage of overall revenue. After all selling medical devices over and over is like pushing rocks up hill compared to selling a service once and then letting the revenues roll in at a high gross profit margin.

Overall, I’d rate ResMed shares a hold on valuation grounds, but still believe it looks one of the best long-term growth stocks on the local market.

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

You can find Tom on Twitter @tommyr345

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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