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Why the ResMed (ASX:RMD) share price is rallying to a 1-week high today

The RESMED/IDR UNRESTR (ASX: RMD) share price may have found a bottom as the stock rallied strongly this morning following the release of its quarterly earnings report.

ResMed’s share price jumped 5.4% to $14.49 at the time of writing – making it the third-best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index after heavy equipment group Emeco Holdings Limited (ASX: EHL) and logistics software firm WiseTech Global Ltd (ASX: WTC).

The sleep disorder treatment company posted a 12% uplift in revenue to US$588.3 million in the September quarter but what is more pleasing is that net profit jumped 23% to US$105.7 million for the period due to its strong operating leverage.

Operating leverage is similar to economies to scale when a company sees a bigger impact on its bottom line than sales due to high fixed costs.

The operating leverage was more than enough to offset a price drop in its masks and devices, probably from increasing competition.

This gives ResMed an edge over its competitors as it has the flexibility to discount products without hurting its bottom line too much.

What’s more, ResMed seems to be firing on all cylinders as all key parts of its business have reported growth.

That will be welcomed news from shareholders who had to witness ResMed’s share price tumble to a four-and-a-half-month low yesterday.

Revenue from the Americas excluding software as a service (SaaS) improved 10% compared to the same period last year thanks to strong sales of masks and devices, but this was overshadowed by the 16% increase in sales on a constant currency basis from Europe and Asia.

SaaS sales jumped 25% due to continued growth of its Brightree service offerings and contribution from the newly acquired HEALTHCAREfirst business.

The company also declared a US37 cents a share dividend although distribution for its ASX stock will be adjusted for 10:1 ratio between the CDIs and NYSE shares as well as the exchange rate at the record date.

Other medical device manufacturers like Nanosonics Ltd. (ASX: NAN) and Cochlear Limited (ASX: COH) are also trading higher this morning although their share price gains are nothing like those of ResMed’s.

In fact, ResMed is the best performer among this group since the start of the year with the stock jumping 34% while Cochlear’s share price is 2% higher and Nanosonics share price is 5% in the black.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Nanosonics Limited. The Motley Fool Australia owns shares of WiseTech Global. 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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