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ResMed shares higher after earnings beat

ResMed Inc. (RESMED/IDR) (ASX: RMD) shares look set to front the S&P/ ASX200 (ASX: XO) leaderboard this morning after the San Diego-based sleep treatment posted a strong Q1 FY 2020. 

For the period ResMed revealed adjusted net profit grew 16% to $135.4 million (all figures in US$) on constant currency sales up 17% to $681.1 million.

ResMed’s all-important gross profit margin also lifted 1.2% to 59.5%, which is the highest it’s been for several years.

The group attributed the margin growth to cost savings and a higher margin contribution from its principal software-as-a-service (SaaS) business Matrix Care

Rising revenues and expanding margins in blue-chip healthcare businesses are a traditional ‘buy signal” for analysts as they tend to equal the potential for turbocharged organic growth, among other positive underlying implications. 

ResMed stock is up around 36% over the past year and has tripled over the past 5 years. It now has a market cap around A$27 billion, which is far larger than popular rivals like Cochlear Ltd (ASX: COH) or Ramsay Health Care Ltd (ASX: RHC). It’s also close to Australia’s largest pure play oil and gas giant Woodside Petroleum Limited (ASX: WPL) and I expect will overtake it soon.

The company will pay a quarterly dividend of $0.39 cents per share on adjusted earnings of $0.93 cents per share that came in around 5% ahead of analysts’ consensus expectations.

The ‘earnings beat’ driven by still strong mask sales in the US, Europe and Asia, as its latest products lift demand and command price premiums. 

We can see the dividend payout ratio only sits at around 42% of earnings. This means it has plenty of free cash flow left over to strengthen its balance sheet or undertake other capital management initiatives such as share buy-backs that it has done historically. 

For now though debt repayment is a priority after a recent acquisition splurge boosted the headline financials but left a lot of leverage.

It revealed it got a $500 million debt placement away over the quarter to pay down borrowings and ease the interest burden on its remaining debt. 

Is it a buy?

Australian holders of the CDIs listed on the ASX hold a 1/10th interest in ResMed’s NYSE-listed scrip so dividends for example translate into $A0.039cps when dividing the US$0.39cps by 10.

As such local investors get marginally higher dividends as the Australian dollar falls. However, the FX impacts net out as ResMed reports in US dollars so a stronger US dollar is also a headwind for operating profits. 

The long-serving CEO and founder’s son remains confident the company will treat 250 million patients annually in out-of-hospital healthcare by 2025.

Given its second-to-none track record of growth and large addressable markets I’d continue to rate this stock a buy. 

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Tom Richardson owns shares of Cochlear Ltd. and ResMed Inc.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. The Motley Fool Australia has recommended Cochlear Ltd., Ramsay Health Care Limited, 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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