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Why you should add this ASX healthcare company to your Christmas wish list

The shareholders of healthcare company ResMed Inc (ASX: RMD) will have plenty to cheer about this Christmas, after the stock hit an all-time high of $22.91 in intraday trading on Thursday.

Although the company’s share price suffered through a pretty steep correction in late January after it delivered weaker-than-expected quarterly profits, the rest of the year has been more or less smooth sailing. So much so that – barring any negative news coming out about the company over the next week or so – it appears likely that its shares will end the year up over 40%.

ResMed, which specialises in the treatment of sleep apnoea and other chronic respiratory illnesses, has delivered a string of consistently strong financial results this year. After the January blip, the company has delivered solid growth throughout the successive quarters, regularly increasing its revenues and expanding its margins.

Take, for example, the most recent quarter ended 30 September 2019. ResMed, which does most of its business in the US, delivered year-on-year revenue growth of 16% to US$681.1 million, while the company’s gross margin increased by an impressive 120 basis points to 59.5%. The margin improvement in particular sends a positive signal to the market, as it shows ResMed is generating increased economies of scale and widening what Warren Buffett refers to as a company’s “economic moat”.

So is it too late to invest?

Based on its FY19 full year results, ResMed currently trades at a price-to-earnings multiple in the mid-50s. This compares favourably with the other major players in the healthcare space. Cochlear Limited (ASX: COH) also trades at a multiple of around 50 times earnings, as does pharmaceutical giant CSL Limited (ASX: CSL).

Based on this analysis alone, this would make ResMed fairly valued relative to its peers. However, it’s worth noting that over FY19 ResMed actually grew its revenues and net income at faster rates than both CSL and Cochlear. This means that ResMed may still offer better value from a growth perspective than either of these global healthcare giants.

Foolish takeaway

Despite a rocky start to the year, ResMed had a great 2019. The last three quarters have delivered strong revenue growth, and the company’s continued ability to keep its gross margin hovering around 60% sends the strong signal to the market that global demand for its products remains high.

I’m a firm believer that healthcare companies make a great foundation around which to build a high-performing portfolio. This is because demand for healthcare generally remains strong even in an economic downturn, while barriers to new entrants are high in the industry. Successful companies, like CSL or Cochlear, reinvest a great deal of their profits back into research and development, meaning they have the resources to defend their products against the threats posed by smaller competitors.

Through its sustained revenue growth and strong margins, ResMed has increasingly shown it can hold its own as a blue-chip in the healthcare space. And if the company can continue to deliver the same level of growth in 2020 as it did in 2019, its shares may well outperform both Cochlear and CSL.

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Rhys Brock owns shares of Cochlear Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and CSL Ltd. 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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