Why I rate ResMed Inc (ASX:RMD) as one of the ASX’s best growth shares

ResMed Inc  (ASX: RMD) has been one of the best performers on the Australian share market over the last 12 months with the San Diego-based company’s share price rising 59% to $14.75 at the time of writing.

The great run has catapulted ResMed’s market capitalisation above $20 billion, surpassing other blue chip stocks such as Amcor Limited (ASX: AMC), Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN).

Following the release of the company’s fourth quarter earnings report earlier this month, is it time for investors buy shares in ResMed?

A solid quarter

ResMed managed to deliver another solid quarterly earnings report with Q4 revenue up 12% to US$623.6 million with growth across all major geographic regions of around 9%-10%.

The company’s high margin cloud based software-as-a-service (SaaS) business Brightree continues to benefit from the growth in the digital health space with revenue increasing 12% to US$40.4 million.

Whilst only comprising 6% of total revenue, ResMed’s SaaS business is one to watch out for over the next few years as the company tries to build a stream of recurring revenues to augment its traditional strength in masks and devices.

Non-GAAP earnings per share, which adjusts for the amortization of acquired intangibles, U.S. tax reform impact, restructuring expenses, foreign tax credit adjustments and other one-offs rose 23% to US$0.95.

The one negative from the report was the minor decline in gross margin from 58.2% to 58.1% that was attributed to a decline in average selling prices which was partially offset by manufacturing and procurement efficiencies.

Foolish takeaway 

Consensus expectations from analysts for FY19’s earnings per share is currently US$3.69. This prices ResMed at a valuation multiple of 29 times forward earnings based on Friday’s closing price of US$107.78 on the company’s primary listing on the NYSE.

Shareholders of the Australian scrip will continue to benefit from the weakness in the Australian dollar that has made new yearly lows in Monday morning trade as ResMed’s ASX listing represents a 1/10th interest in the NYSE scrip.

ResMed is the market leader in its industry and remains one of the best long-term large cap growth stocks on the Australian market. Nevertheless, on the basis of valuation, I’d view the stock as a hold with an intent to accumulate on any significant weakness.

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Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. The Motley Fool Australia has recommended 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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