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Why ResMed Inc. (ASX:RMD) is one of the best growth stocks on the ASX 200

Sleep treatment specialist ResMed Inc.‘s (ASX: RMD) share price has risen 34% over the last 12 months, comfortably outperforming the broader market’s loss of 2%. The ASX 200 listed scrip has delivered another excellent quarterly earnings report surpassing the consensus estimate from analysts on both the top and bottom line.

Another great quarter

The September quarter has traditionally been the company’s weakest quarter. However, last week’s quarterly earnings report revealed that the company is continuing to effectively implement its growth strategy and is on target to achieve its long-term goal of changing 20 million lives by 2020.

Revenue for the quarter grew by 12% over the prior corresponding period to US$588.3 million, beating the consensus estimate of US$574 million. ResMed has expanded its product portfolio with new masks and ongoing upgrades to its increasingly important digital health solution offerings that remain a key factor in driving revenue growth and differentiating the company from its competitors. Geographically, revenues rose by over double digits across all major markets with the highest growth of 25% coming from the company’s software as a service business.

ResMed also managed to deliver effective cost control for the quarter with selling, general and administrative expenses increasing by only 2% over the prior corresponding period. The company’s operating leverage continues to impress and resulted in income from operations rising 28% to US$144.1 million and non-GAAP earnings per share increasing 23% to 81 cents, beating the consensus estimate of 78 cents.

Foolish takeaway

Shareholders of the Australian listed scrip have profited from the weakness in the Australian dollar as the ASX listing represents a 1/10th interest in the NYSE scrip. With the Australian dollar falling from 78 US cents to 71 US cents in 2018, shareholders of the Australian scrip have seen a 34% rise in their holding versus the 23% increase in the NYSE scrip.

ResMed and other healthcare companies such as CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH) offer investors an opportunity for solid growth over the long-term that differs from the traditional large end of the Australian market that is skewed towards the large banks and other mature businesses. Of course, these companies do not come cheaply and some caution is warranted to avoid overpaying for growth.

In ResMed’s case, the company is trading for around 28 times estimated FY19 earnings and 25 times FY20 estimated earnings. Therefore on a valuation basis, I would view the stock as a hold at current prices but with a view to add on any significant weakness.

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Motley Fool contributor Tim Katavic owns shares of CSL Limited. 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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