The ResMed Inc. (ASX: RMD) share price could continue its ascent on Monday after the sleep treatment-focused medical device company was upgraded by a leading broker.
What happened?
Last week ResMed released its fourth quarter and full year results, revealing a 13% increase in quarterly revenue to US$705 million and an 11% increase in full year revenue to US$2.6 billion.
One broker that appears to have been very impressed with this performance was Goldman Sachs.
According to a broker note, its analysts have upgraded ResMed's shares to a buy rating and increased the price target on them to $21.20. This price target implies potential upside of 11.5% for its shares over the next 12 months.
The broker made the move after increasing its earnings forecasts through to FY 2022 and factoring in a strong re-rating of its sector and its peers.
Why does Goldman Sachs like ResMed?
Goldman likes ResMed due to its belief that mid-term market fundamentals are very supportive.
For example, its analysts have noted the improving penetration of an under-diagnosed condition.
They said: "Whilst absolute numbers can be debated, we are comfortable around penetration upside in key addressable markets, which are themselves growing through co-morbidity incidence as well as straightforward population/aging demographics. Despite progress in recent years, penetration likely remains below 20% in US (c.5% in Europe and far lower in RoW)."
In addition to this, the broker points out that pricing dynamics are more favourable currently than at any other time over the last decade.
"We expect stable pricing across both Medicare and commercial channels through CY20, hence see scope for modest organic gross margin expansion through this period and potentially beyond."
And finally, Goldman is pleased with the company's portfolio management.
Its analysts note that ResMed has "launched a series of mask iterations at regular intervals and is now seemingly outperforming the #2 player in the top-of-head market." This is a key growth area which it was initially not present in.
Furthermore, it said: "we are now beyond the typical 4-5 year life-cycle of a flow-generator, and we would expect AirSense 11 to provide attractive optionality as/when conditions begin to slow."
All in all, Goldman Sachs believes the future is bright for this growing company.
Elsewhere, the broker has downgraded Bingo Industries Ltd (ASX: BIN) shares to a neutral rating with a $2.80 price target and taken Telstra Corporation Ltd (ASX: TLS) shares off their conviction list but retained their buy rating and increased the price target on them to $4.20. Both changes were made largely on valuation grounds following strong share price gains.
