Shares in ResMed Inc (ASX: RMD) tanked on Friday after the healthcare company's quarterly revenues fell short of analysts' expectations.
ResMed, which specialises in the treatment of sleep apnoea, announced that revenues for the quarter ended 31 December 2018 were US$651.1 million, up 8% over the prior comparative period (or 9% on a constant currency basis). However, this was well below the US$ 673.3 million that analysts surveyed by Bloomberg predicted.
The announcement prompted a massive selloff on Friday, with ResMed shares plummeting over 12% to $14.47, their lowest price since November. This would have no doubt come as a shock to most shareholders, as ResMed shares had only just surged to a new 52-week high of $16.57 on Wednesday.
But perhaps the rate of growth in its share price meant a correction was always looming. Notwithstanding a lull around October, when global share markets were suffering through intense volatility, shares in ResMed have been consistently on the up over the last 12 months, climbing over 30%.
This puts their performance on a par with global biotech giant CSL Limited (ASX: CSL), and easily betters Cochlear Limited (ASX: COH), which only managed to post gains of roughly 15% over the same time period.
To put this in some perspective, ResMed was the ninth-best performing stock on the S&P/ASX200 in 2018. That sort of stellar performance is difficult to repeat.
But there were still some positives to take out of ResMed's quarterly financials. Gross margin expanded by 70 basis points to 58.9% mostly as a result of manufacturing efficiencies and favourable changes in its product mix.
And a number of strategic acquisitions also progressed further this quarter. ResMed completed the purchase of MatrixCare for US$750 million, and announced the acquisition of Propeller Health for US$225 million.
MatrixCare is a digital healthcare company that specialises in developing software solutions for the aged care and retirement industries. Its digital technology helps nursing staff working in those facilities manage patient treatment plans as well as things like human resourcing and payroll. It currently services more than 15,000 locations across the US.
Propeller Health is a start-up that has quickly made a name for itself through its innovative treatments for asthma and chronic obstructive pulmonary disease. It also uses digital technology to help patients suffering from these respiratory conditions manage their treatment regimes.
These acquisitions show that ResMed is eager to expand into new areas, which brings commensurate levels of both growth potential and risk. MatrixCare allows the company to continue its push into the digital healthcare space, while the Propeller Health purchase shows that ResMed is eager to diversify into new treatments and product offerings.
Foolish takeaway:
There are two reasons for the recent slide in ResMed's share price. The obvious one is that the company missed – by some margin – analysts' consensus forecasts for its quarterly revenues. But this has been compounded by investor nervousness around its continued expansion into new business areas.
Each time a company chooses to expand its product offerings it will inevitably be going up against new competitors with potentially greater experience and a more established track record. And in this current low-risk environment shareholders are particularly wary of these sorts of activities.
However, the Propeller acquisition really allows ResMed to leverage its existing expertise in the sleep apnoea field to treat other related respiratory conditions. On the face of it, this seems to make sense. It also makes sense for the company to want to build its digital technology capabilities in order to try and futureproof its business model.
I'm bullish on ResMed, as well as most other healthcare blue chips like Cochlear and CSL. I think these companies all operate at the cutting edge of the fields and have plenty of capital available for R&D to defend their market dominance – plus demand for their products will only continue to grow as global populations age and emerging nations develop. In my opinion, this dip provides an ideal buying opportunity to snap up a solid long-term growth prospect on the cheap.
