The ResMed Inc (ASX: RMD) share price is down nearly 8% in 2019. Despite soft second-quarter earnings, a solid pipeline of new products and a strong balance sheet could see the ResMed share price recover strongly in 2019 and possibly break 52-week highs.
Soft earnings
ResMed is a global manufacturer of medical devices and treatments focused on the management of respiratory and sleep disorders. The dual-listed company was the 9th best performer on the ASX 200 in 2018 with a 45% return. Earlier this year ResMed delivered second-quarter results which fell short of market expectations, seeing its share price plunge nearly 19%. ResMed had cautioned the market earlier that its strong record of growth would be tough to repeat in the second quarter.
ResMed delivered revenue of $US651.1 million for the second quarter in comparison to market expectations of $US673.3 million. In addition, analysts expected GAAP earnings per share (EPS) to be 93 US cents versus the 86 US cents reported by ResMed. Highlights of the report included a 20% increase in profit of $US338.1 million, reflecting the sale of higher margin products. Of interest were software sales and service revenue which increased by 63%. In addition, a one-off tax reporting change saw ResMed's net profit grow 141% to $US230.4 million, in comparison to $US95.7 million the prior year.
Expansion into digital health
While medical devices remain the core of its business, ResMed's long term strategy involves expanding into health software. As more patients move to cloud-connected devices, ResMed views digital health as a key sector for future growth.
In a bid to expand its digital health operations ResMed completed a $US750 million acquisition of MatrixCare in the second quarter. In addition, the company announced intentions to acquire Propeller Health for $US250 million. MatrixCare is a US-based company that provides software to retirement villages allowing for streamlined care, nutrition and payroll management. Propeller Health is also a US-based company that makes sensors for inhalers that can be paired with software, providing analytics and medial alerts for patients with respiratory conditions.
Is the ResMed share price a buy?
Usually quarterly earnings are volatile and these fluctuations don't reflect the underlying business. Although second-quarter results didn't meet market expectations, ResMed managed to achieve a sixth straight quarter of income growth with impressive margins. The constant growth in revenue and EBITDA reflects a strong global business model and bodes well for future EPS.
ResMed is part of a rapidly growing sector and has a strong pipeline of products to ensure future growth. Acquisitions and expansion into digital health is a great supplement to ResMed's core business as it encourages recurring revenue with low set up costs, as devices and technology improve.
As part of the healthcare sector, ResMed is a classic defensive play and US dollar exposure is also attractive to investors as the Australian dollar falls. In my opinion, ResMed is a long term buy and has great potential to beak its 52-week highs.
