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Why the ResMed share price is getting smoked

The ResMed Inc. (ASX: RMD) share price is down 10% today to follow on from last Friday’s 12% fall in another leg down on the back of its weaker-than-expected quarterly profit result delivered last Friday.

The company disappointed the market after revealing quarterly constant currency revenue growth of 9% to US$651.1 million translated into a flat adjusted profit of US$144.5 million and flat earnings per share of US$1.

The lack of bottom line growth combined with a ballooning debt pile and interest expenses have led investors to hit the sell button as the company flagged quarterly interest expenses around US$14 million per quarter higher over the six months ahead.

ResMed has spent around US$1.78 billion (A$2.5 billion) on acquisitions mainly in the popular software-as-a-service (SaaS) space over the last couple of years as its CEO pursues a strategy of making it a leader in cloud-based digitally connected healthcare solutions.

While this is an admirable strategy, SaaS businesses tend to boast lofty valuations thanks to their attractive economics and ResMed is now sporting a stretched balance sheet while its top line is not showing a huge return on investment for the shopping spree.

To be fair ResMed and its CEO have an absolutely superb long-term track record, so the market’s short-term impatience in lopping 20% off its value may be a good buying opportunity. Moreover, in sending the shares up 35% prior to last week’s result investors probably got carried away to the upside over the past year, just as they can also get carried away to the downside.

ResMed is one of three healthcare stocks on the local market I have regularly recommended to investors over the last 4 years, with the other two being CSL Limited (ASX: CSL) and Cochlear Ltd (ASX: COH). On current valuations I’d happily buy CSL and ResMed, but Cochlear shares still look too expensive to me.

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Motley Fool contributor Tom Richardson owns shares of Cochlear Ltd., CSL 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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